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Posts Tagged ‘taxes’

Let’s Not Forget How Federal Revenue Shortage Began

My post from earlier this week about big government Republicanism made it into today’s Wall Street Journal. Check it out.

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Gary Johnson Reacts To June Job Numbers

Gary Johnson reacts to the June jobs report by issuing a statement via his campaign website:

The anemic jobs numbers for June simply confirm what Americans already know: That employers cannot and will not hire new employees with the federal government continuing to rack up trillions of new debt, a tax system that does all the wrong things, and massive uncertainty about the true costs of impending health care mandates.

Abolish income taxes, repeal the health care mandate, eliminate deficits, and then watch as American entrepreneurs and the private sector put millions back to work.

The time for hand-wringing and nibbling around the edges is past. We don’t need a 10-year plan for balancing the budget; we need a 1-year plan. We don’t need token reductions in income taxes; we need to eliminate them. And we need to elect a President and a Congress who get the simple fact that less government will mean more jobs.

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Federal Revenues Are Historically Unresponsive To Top Marginal Tax Rates

With all eyes on Europe as France and Spain struggle to close their budget deficits while global markets anxiously wait for a final Greek exit to put a hole in the Eurozone, things seem quiet on the fiscal policy front here in the United States, but brewing under the surface is another big fiscal fight over the national debt, yearly budget deficit, and the debt ceiling.

One relevant principle in economics is the observable phenomenon that increasing tax burdens hinder an economy’s outputs. In 1913, passage of the 16th Amendment permanently embedded the income tax into our lives, but the seemingly counter-intuitive inverse relationship between taxation rates and tax revenues ever since is well documented. Regardless of marginal rates, tax revenue as a share of GDP remained static in a narrow range of 18-20%, even in the 1960s when the top marginal tax rate was 90%:

tax rates and revenue as a share of GDP Federal Revenues Historically Unresponsive to Top Marginal Tax Rate

Graph via AmericanThinker.com

These are interesting figures for a nation founded on resistance to unpopular taxes. At the Wall Street Journal, W. Kurt Hauser summarizes: “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” If we eliminate the cable news, split screen, partisan mentality from the equation and focus on the numbers, it becomes apparent that we just can’t tax our way to a balanced budget. Economist Antony Davies explains:

“[T]he richest 5 percent of Americans already pay a tax rate almost three times higher than the average tax rate of the remaining 95 percent. It’s hard to argue that the richest aren’t paying a fair share of taxes. Aside from that, for the richest Americans to shoulder the deficit, we would have to raise their effective tax rate to 88 percent. At 88 percent, a family earning $300,000 each year has only $36,000 after taxes—less than the average American earns.”

“The budget deficit is so large that there simply aren’t enough rich people to tax to raise enough to balance the budget.”

Moreover, even if we could eat the rich, the accumulated windfall tax revenue would still end up in the hands of bureaucratic central planners under the false pretense that a single planner can act as an architect of the economic activity of millions of market actors. In The Theory of Moral Sentiments (1759), the founder of modern economics as we know it, Adam Smith describes this behavior by a “man of system”:

“[Such a man is] apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his ideal plan of government that he cannot suffer the smallest deviation from any part of it.”

Economist James Otteson explains Smith’s “man of system”:

“The man of system faces a problem: individual people are not chess pieces to be moved only under someone else’s authority. Individuals make their own decisions and move on their own. When individuals are constantly butting up against demands from the government that they find imposing or contrary to their desires, Smith says, ‘society must be at all times in the highest degree of disorder.’”

But again, our history of marginal tax rates and total federal revenue as a percentage of GDP shows that rather than focus on taxes and revenue, getting the fiscal house back in order requires a sober assessment of the bipartisan spending problem. An intellectually honest dialogue about entitlements, a third rail of American politics, must occur at the national level. In their current structure, spending on programs like Medicare and Medicaid will engulf the budget in the next couple of decades. Any expectation of receiving future benefits from these programs requires serious, immediate cuts.

Mathematically, this perpetual runaway spending is simply not sustainable. No level of taxation will be able to keep it going, as the data above show.

Cross-posted from IVN

Critiquing Cain’s 9-9-9 Plan

When Herman Cain initially launched his catchy, infomercial-like 9-9-9 tax plan, I found it rather amusing. Now that Cain is somehow making waves in the GOP primary polls, 9-9-9 is coming under scrutiny from all sides. The criticisms from the left are predictable; however, I’m more interested in the critiques offered by free market advocates.

Cato’s Dan Mitchell airs his concerns:

Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means — for all intents and purposes — that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan — the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

Dean Clancy of Freedom Works shares Mitchell’s concerns:

Cain doesn’t get rid of the income tax. Instead, he reforms it. And then he adds a new levy — a national retail sales tax — on top of it.

[…]

The second problem with Cain’s plan is more serious than the first. It puts in place the infrastructure for a VAT, a Value Added Tax. That’s bad.
No, that’s very bad.

A VAT is a form of national sales tax that is collected at every stage of the process from the initial sale of raw materials to a manufacturer to the final sale of a finished product to an end-consumer. It’s the most insidious of all taxes, because it is built into the price of everything and consumers can’t see how much of the price is due to the tax. When taxes rise, prices rise, but consumers mistakenly assume that’s just market forces at work. Politicians love a VAT: it lets them take a lot more money out of our wallets. And VATs usually exist side by side with income taxes, not in lieu of them. Taxpayers should hate VATs for the same reasons politicians love them.

Reason’s Tim Cavanaugh also weighs in:

Not only has Cain avoided tying his national sales tax to even a vague promise of future repeal of the 16th Amendment (as H.R. 25 does); he doesn’t even want to suspend, let alone repeal, the income tax.

In fact, 9-9-9 is a significant step back from the Flat Tax proposals Republican business candidates used to offer in the Clinton era. In 1996 Steve Forbes got attention for supporting a no-exemptions income tax pegged at 17 percent. That wasn’t perfect, but at least it would have reduced the number of distortions the IRS causes in the private economy.

Now Cain would have you believe that in exchange for a near-halving of a flat tax target that was vaporware when Steve Forbes proposed it, we should agree to give Congress the same power of taxing all business transacted in its jurisdiction that now belongs to your local city hall or governor’s mansion?

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The Growth of Government Since 1980

Celebrating the 30th anniversary of Milton Friedman’s Free to Choose television series, PBS is airing highlights of the series followed by relevant panel discussions. George Mason University Economist Bryan Caplan appeared on one such panel with, amongst others, former economic advisor to President Obama and current University of Chicago Economist Austan Goolsbee.

During the ensuing discussion, Goolsbee remarked that when Friedman’s series originally aired in 1980 he agreed that government was too big and intrusive; however, Goolsbee maintains that today it no longer remains the case. Yesterday, Caplan wrote that he was unable to fit a major point in during the discussion rebutting Goolsbee’s line of reasoning:

 …If Friedman was right then, he’s right now.  Check out Table 15.3.  (Update: Broken link fixed).  Federal spending as a percent of GDP in 1980: 21.7%.  In 2009: 24.7%.  Goolsbee emphasized the shift toward Social Security and health spending.  But so what?  Friedman’s critique is truer than ever.  Government continues to spends a ton of money on people who aren’t even poor.  Much of this spending – especially health care – is pure waste.  And the problem’s only going to get worse.

Goolsbee also emphasized that Social Security and Medicare enjoy strong public support.  Right he is.  So were most of the programs Friedman attacked back in 1980 – and he explicitly admitted it.  Friedman’s point then, and my point now: The public is wrong.  Indeed, the public is delusional.  It’s crazy to tax everyone to provide “free” pensions and health care for everyone.  And it’s logically impossible for benefits to permanently grow faster than GDP.

Goolsbee also argued that government growth isn’t so bad if it’s only temporary.  I wish I’d asked him, “And isn’t ‘temporary’ precisely what price controls on energy were supposed to be?  If Reagan hadn’t been elected, price controls could easily have been as long-lived as rent control in New York.”  I’m afraid the new regulations and spending that the U.S. embraced in 2008 will work the same way.  You can call them “temporary,” but unless a staunch ideological opponent somehow gets elected, the new statism here to stay.

Image via flickr user PeterGuo

Lazy Sunday Links

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Progressive Tax and Alexander Hamilton

My letter to the Sun-Sentinel on Alexander Hamilton and tax policy was published yesterday.  It only took them six weeks to print it.  Better late…

Herman Cain Dials 999

September 8, 2011 1 comment

The former Godfather’s Pizza CEO and fan of all things that come in three’s initially championed the Fair Tax, a federal tax on consumption that eliminates the entire tax code. During last night’s GOP debate, however, Cain changed his stance on taxation while simultaneously auditioning for late night infomercials by introducing his newest three-point plan: the999.” This sudden pivot advocates a 9% tax on personal and corporate income, as well as consumption. Perhaps the politician-bashing CEO is becoming more of a politician before our eyes – employing catchy sound byte pseudo-policy phrases in three bullet points or less (or its free…wait, that might be Domino’s). Personally, I’d like to see Herman Cain count on QVC one day. Dial 9-9-9, operators are standing by!

War Is Big Government at its Biggest

Over at The Atlantic, Conor Friedersdorf laments the hypocrisy of those who fear big government creep in domestic matters, yet turn the other cheek when it comes to the state waging war.  He implores Tea Party types who see Obamacare as the greatest threat to liberty and even the Obama backing left to turn their attention to how the state greatly expands its power during wartime.  Friedersdorf ably makes his case by pointing out just what policies the government has implemented over the past decade:

[W]e’ve created a new cabinet level super-agency, the Department of Homeland Security. We’ve waged foreign wars whose ultimate cost will easily reach into the trillions of dollars, all of which will be born by taxpayers. Fourth Amendment protections against government searches without due process have been significantly weakened, as has the expectation of privacy enjoyed by the average citizen. Traveling on an airplane is now deemed just cause for agents of the state to look underneath our clothes and to feel our genitals, making thousands deeply uncomfortable. The president himself now asserts that he possesses the unchecked power to put American citizens on assassination lists if he deems them to be a terrorist.

Much as I am opposed to Obamacare and the ever-expanding regulatory state, what Friedersdorf lays out above, to my mind, is a far more egregious expansion of government power.  When states wage war, they move quickly to expand and consolidate power. As Gary Chartier recently pointed out:

State actors’ perceived need to mobilize and consolidate domestic support for war leads to the implementation of repressive measures, including censorship, propaganda, torture, surveillance, and due process violations of various kinds. Not only are these troubling on their own—they also are all too likely to persist after war’s official end.

…War-making by states helps to birth all-too-intimate relationships between politicians, military leaders, and economic elites happily dependent on the money provided to pay for military equipment and other resources. The wealth siphoned off by these elites is often misspent even from the perspectives of those who favor war in principle, given the wastefulness and inefficiency of war production undertaken in tandem with the state. But it also gives them more access to and more influence over politicians, enabling them both to press for non-war-related privileges and also, and even more troublingly, to push for continued preparedness for war during peace-time and even, all too frequently, for new hostilities.

State-made wars are funded using taxes extracted from the unwilling—which ought to be troubling because nothing entitles the state to claim anyone’s resources at gunpoint.

While it may not seem like it at face value, the state’s decision to wage war permeates all aspects of society effecting both civil and economic liberties.  Now, this is not some new revelation, as James Madison succinctly put it in 1795:

Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare.

Image via Flickr user abudoma

We All Don’t Benefit

Here is a letter to the Sun-Sentinel:

Mr. Kaufman asks, “What happened to our wonderful country?”  It’s not as simple as altering tax policy (Roll back tax codes to the good old days, August 7).  Decisions made by the federal government over time, intended or not, encourage anti-competitive behavior on several fronts.

While we benefit from education, we don’t benefit from education monopolies.  Since the inception of the federal Department of Education, we’ve spent nearly $100 billion.  And yet test scores are stagnating, people lack school choice, costs are up, and teachers’ wages remain in question.  The one-size-fits-all approach does not work for education, and we don’t all benefit from it.

Access to affordable healthcare for all would indeed be a great benefit, but we certainly don’t benefit from healthcare monopolies.  Current laws protect insurance companies from competition, facilitating perpetual cost increases, and guarantying the industry 300 million clients.  Government protectionism does not work for healthcare, and we don’t all benefit from it.

Knowing the certainty of American military protection, other industrialized nations eschew costly defense spending and instead provide their citizens with nationalized health care and pension plans through massive borrowing and taxation.  Some of these countries, like Greece, are experiencing the blowback of unsustainable promises to its citizens.  Top-down central planning does not work for retirement pensions, and we don’t all benefit from it.

Mr. Kaufman longs for the tax code of “the good old days when our country prospered;” however, taxes are a short sided distraction from the problems that we all don’t benefit from.

Sincerely,

Craig D. Schlesinger

>Income Taxes Restrict Individual Liberty

> Everyone is tax bashing today, so I just want to make a couple of brief points. Income taxes reduce the economic liberties of individuals, stifling economic growth in the process. The government has a say in how individual earnings are allocated before people are given a chance to decide for themselves. Certainly, more money in each hand translates to increased consumption, investment, and savings. Since consumption and investment fuel the markets, this can only lead to a positive uptick in economic activity.

The only logical thing to do is to get rid of the income tax (including dividend and capital gains taxes) and replace it with a static rate consumption tax. But this approach is part of a larger philosophical idea about the role of government in people’s lives, and I tend to advocate the advancement of greater liberty for the individual.
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