Taxes « TruPolitics

The Roots of the Tax Debate: Why Tax At All?

December 6, 2010 Leave a comment

This post was written by Edward Mahee. Writing under a pen name, Mr. Mahee is a legal analyst and political commentator. This is his 13th posting for the site.

On November 30, President Obama invited leaders of both houses of Congress, including the leadership of the incoming Republican majority, to discuss whether and to what extent current tax rates should be extended beyond December 31, 2010. Leaving aside the last minute timing of such an important issue, it is surprising that with anemic economic growth, persistently high unemployment, and general malaise, that some would even consider raising taxes. But, when viewed through the prism of a fundamental philosophical divide, the issue becomes clear.

Andrew W. Mellon, Treasury Secretary from 1921-1932, stated unambiguous principles he felt ought to guide tax policy: “The problem of the Government is to fix rates [of taxation] which will bring in a maximum amount of revenue to the Treasury and at the same time bear not too heavily on the taxpayer or on business enterprises. A sound tax policy must take into account three factors. It must produce sufficient revenue for the Government; it must lessen, so far as possible, the burden of taxation on those least able to bear it; and it must also remove those influences which might retard the continued steady development of business and industry on which, in the last analysis, so much of our prosperity depends.” The underlying principle, then, is very simple—the purpose of taxation is to raise revenue for the maintenance and operation of the government, but in a manner that does not inhibit personal liberty or private enterprise.

Mellon’s principle is sound, given that the role of taxation is only to raise essential and necessary revenue for the government. There are many, however, including the current Administration, that fundamentally disagree with that premise. Rather than raise revenue for the government, taxation provides a vehicle by which the government can control behavior, payoff special interests, and punish or reward certain constituencies as the political class sees fit. For proof, look no further than the debate of candidates for the Democratic presidential nomination in 2008, featuring then-Senator Barack Obama: When informed that his policy of raising the capital gains tax rate may actually reduce revenue to the federal government, Senator Obama retorted that raising the rate of taxation on capital gains was a question of fairness, not just revenue.

With the United States running more and more into the red, and consequently closer and closer to bankruptcy, the primacy of revenue among the purposes of taxation has reemerged as a lodestar concerning tax policy. Economist W. Kurt Hauser, a leading thinker on the subject, recently observed that since the end of the Second World War, tax revenues as a percentage of gross domestic product (“GDP”) have averaged fewer than 19% regardless of the top marginal income tax rate. This is an astonishing observation, since during the period in question the top marginal tax rate on personal income was anywhere between 28% and 92% (currently the top marginal rate is 35%). How can this be? According to Mr. Hauser’s November 26 article in the Wall Street Journal:

“Higher taxes discourage the ‘animal spirits’ of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs.”

Which brings us back to Mr. Mellon’s principle of taxation. Given that the federal government’s intake of funds from personal taxation is roughly 19% of GDP, shouldn’t its tax policy be aimed at maximizing GDP? That is, its policy should be able to raise revenue for the government while at the same time not “retard[ing] the continued steady development of business and industry.” If the government is going to take in 19% of the GDP pie regardless of the top rate, its focus should be on growing the pie, not trying to take a larger slice of a shrinking pie. Meaning, the government’s tax policies should encourage investment, enterprise and profit.

Of course, this all hinges on the belief that the goal of the federal government’s tax policy is revenue for the maintenance and operation of itself. Unfortunately, for many on the progressive left, the goal of tax policy is not revenue, but societal control and redistribution. Which is why, even as it becomes more and more clear that the government is sinking into bankruptcy and the country into malaise, the progressive left will continue to argue that some people “deserve” to have their taxes raised. If progressives succeed in raising taxes on the “rich”, they can be satisfied that they were able to use the weapon of class warfare successfully. As more people lose their jobs and capital dwindles, the progressives will look over the decaying world they helped create and console themselves by saying that at least they stuck it to the “rich” man.

-Edward Mahee for TruPolitics.net

Filed under Economy/Fiscal Issues Tagged with Bush Era Tax Cuts, Economy/Fiscal Issues, Taxation, Taxes, TruPolitics, TruPolitics.net

The Tyranny of the Flywheel

April 22, 2010 7 Comments

Gaining and keeping power in a democracy is simple: Get more votes than your opponents. If you do this consistently, you can build permanent bureaucracies to institutionalize your agenda, drive money to special interests, and ultimately enhance your power. It’s the flywheel of government growth: Pander to get votes; win elections; use your majority power to build institutions and pass legislation that drive money to special interests and key voting blocs; those groups support you in your next election; the support helps you win. Repeat.

Now imagine that the critical first step in the flywheel (pandering to voters) can be accomplished through a narrow political strategy: Spending. Recent data released from the Tax Foundation notes that a full 60% of Americans consume more government services than they pay in taxes. The Urban-Brookings Tax Policy Center showed that by 2011, 46% of Americans will pay $0 in federal income tax. This group, despite paying nothing into the system, will receive over $40 billion in government services. That’s a pretty good deal.

Even better, according to the most recent data from the IRS, the top 5% of wage earners pay 60% of all income taxes (despite making only 37% of income). Under President Obama’s new tax-and-spend heavy budget, this number will increase year-by-year for the duration of his term.

So, if you were playing the political game, would you target the 5% payers, or the 60% consumers? If you could appease the vast majority of voters by giving free government handouts, would you favor small government or big government?

In a pure democracy, power is gained through votes. Votes are gained by appeasing the greatest number of voters. When the greatest number of voters are consumers of government service rather than payers, expansive liberal policy is simply smart politics. If you want to win, you had better deliver big government. That’s why billions of dollars are wasted each year in pork-filled legislation, why two-thirds of the nearly $800 billion “Stimulus” went directly to special interest groups, and why entitlement programs now consume more GDP than ever before.

In politics, it is much easier to provide handouts than encourage responsibility. It’s much easier to “solve” problems through programs than make hard budgetary reductions. It’s much easier to hand out than to cut back. It’s much easier to give speeches wrapped in rhetoric of “compassion” and “help,” to promise that you will fix, bailout, and save, than to talk about fiscal responsibility, individual liberty, and self-reliance. It’s much easier to cast yourself as savior than as referee. If it is true that “the easiest way to get a vote is to buy a vote,” then liberalism simply makes practical political sense.

The problem, however, is that such a system creates a tyranny of the majority. The rights of 5% are trounced in favor of the political expediency of 60%. Politicians create irreversible entitlements (Social Security, Welfare, ObamaCare), build burgeoning bureaucracies, and pack the court system with activist judges. The political flywheel spins with ever-increasing fury as government grows and grows, until it eventually crumbles under its own malaise, mounting debt, and unsustainable liability. Liberty for some is pushed aside in favor of power for others.

That is why America was not founded as a pure democracy. America was founded as a Constitutionally-constrained Democratic Republic. Certain rights were to be inalienable, no matter the shifting tide of public sentiment or the growth of special interests. Personal property rights, the right to keep what you earn, to be taxed only when absolutely necessary, were to be protected by immutable Constitutional law. Our founders knew that unconstrained government always tends toward growth—men have always longed for increased power. That’s why our founders outlined limited places government could intervene and spend, and sought to isolate the major branches from one another. Sadly, we’ve drifted so far from Constitutional constraint that our country—yes, even America—is rapidly being consumed by the weight of the political flywheel.

The center-left Tax Policy Center recently ran data models to show what it would take to stabilize the deficit at 2% of GDP (the level economists recommend for long-term stability and economic growth) under President Obama’s new budget. They found that government would have to raise $775 billion in new taxes every year through the duration of his term. If he keeps his promise not to raise taxes on the middle class, the rich (those making more than $200,000 a year) will have to pay 90% of their income in taxes. But, not to worry, they only comprise 5% of the voting public.

We need leaders committed to principle over power. We need representatives who see themselves as citizens, not politicians. We need a government willing to roll back its unfettered reach, to return our nation to what it was meant to be. We may be at a tipping point for our country, and the stakes have never been higher.

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

Filed under Conservatism Tagged with big government, Conservatism, Flywheel, Liberalism, Tax policy, Taxes, TruPolitics, TruPolitics.net

The Elephant in the Room

March 4, 2009 1 Comment

elephant1 Some problems are simply too big to ignore, aren’t they? Some political issues should be so important that they demand the attention of both parties, right? For almost a decade, however, one of the most impactful economic and fiscal issues of our time has simply been pushed aside by both parties. At best, it has been the elephant in the room that nobody wants to acknowledge, but everybody knows is there: As of last week, the United States government had a $1.75 trillion budget deficit. Simply put, as a nation we owe more than we have-substantially more. The debt is damaging the economy, increasing our risk abroad, and placing a great burden on future generations.

When a government has a deficit, it needs to raise money to pay for spending initiatives, and each step in the process has potentially devastating results. Our leaders need to take a hard look at the consequences, and consider how the damage is spreading:

Increased debt to foreign countries: In order to finance massive deficits and raise revenue for government spending, one of the most commonly used methods is to sell debt to foreign nations. There was a tremendous example of this last week, when Secretary of State Hillary Clinton visited China to encourage them to purchase more U.S. Treasury Bonds. The current national debt stands at $10.6 trillion, meaning we owe close to 75% of our current GDP to foreign nations. In response to Secretary Clinton’s visit, the Chinese government, which already holds approximately $700 billion in U.S. bonds, will likely ramp up its holdings to close to $1 trillion. This should be worrisome. When any foreign nation holds that much debt, it increases its economic and fiscal leverage, especially when so deeply entrenched in treasury bonds. This gives a nation like China tremendous leverage in out financial system, as a massive sell-off of government debt would lead to hyper-inflation, massive revenue loss, and wide-spread instability in the market. This financial weapon may be the most potent in future questions of national security. Think of it this way: Would you want to be personally indebted to one billion strangers?

Higher taxes:The other option to finance a deficit, recently championed by the Obama Administration, is to raise taxes. Raising taxes temporarily brings more revenue back to the government to pay down debt and finance spending projects. The problem here, however, is that a higher tax rate pulls money out of the economy and into the government. This quickly suffocates investment and consumption, key factors of economic prosperity. In other words, the more money the government charges businesses and consumers to invest, the less they will invest. The more money the government takes from consumers’ earned income, the less those consumers will spend. When you cut investment and consumption, the economy stalls.

Inflation: The final option to finance government spending is for the government to print money. This has been happening for years, most notably with the recent TARP and bailout programs, where the government needed to generate cash to pay for its spending commitments. Since we are have a deficit, that cash is simply not there, so the government uses its ability to print money to provide necessary funds. However, when a government prints money, especially over the long term, inflation results. The more money circulating in the economy, the less each dollar is worth-this is a classic case of monetary supply and demand. Essentially, this means that each dollar you now have will be worth less in the future, unless your investments pace properly with the rate of inflation. But if you combine inflation with low investment and consumption, you have an economy in downturn with inflation rising rapidly. This, of course, is how economies fall into depression.

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Who’s responsible? Both parties are to blame, as are their leaders. When President Bush took office in 2001, he inherited a $128 budget surplus, one of the shining achievements of the Clinton Administration. At the end of the federal budget year for 2008, the Congressional Budget Office reported a deficit of $438 billion-the fastest eight year deficit growth in the history of the country. The Bush Administration was hurt by the post 9/11 recession, which greatly impacted tax revenues, as well as massive spending on the Iraq War, but a huge portion of the deficit came from costly congressional spending. Expensive programs like No Child Left Behind and Medicare drug supplementation, combined with President Bush’s reluctance to veto earmarks and pork-laden bills, created an environment of spending far from fiscal conservatism. Now, after inheriting an already massive deficit, President Obama recently pushed through a $787 billion spending stimulus and $3 trillion budget. Combined with the various bailouts and the TARP program, analysts expect the deficit to double by 2010.

The solution to the deficit problem is simple: practice fiscal responsibility. This means reigning in spending, aggressively eliminating earmarks and pork, and shrinking government bureaucracy. One of the great faults of the Bush Administration was its branding as ‘conservative,’ while it continued to widen the deficit and spend at unprecedented rates. We have gone nearly a decade without fiscal responsibility, and past Administrations, from Reagan to Clinton, proved that economic prosperity comes with fiscal conservatism. Our current exposure will only lead to greater economic deceleration, increased leverage from foreign nations, and market instability. We can no longer ignore the elephant in the room.

-Matt Benchener from TruPolitics.net

Filed under Economy/Fiscal Issues Tagged with Budget, Deficit, Democrats, News, Obama, Politics, Republicans, Taxes, TruPolitics, TruPolitics.net

Conservatism vs. Liberalism Part II: Conservatism (by guest author Maker from The Daily Switch)

February 27, 2009 Leave a comment

This is the second in the two part series Conservatism vs. Liberalism. Forming the underpinning of our two most prominent political parties, the ideological debate over Conservatism and Liberalism is as old as our nation’s founding. Now, with a new administration in office, this debate has been reinvigorated. Part II features guest author Maker from The Daily Switch, offering an overview of Conservatism.

“I would rather be exposed to the inconveniences attending too much liberty than to those attending to small a degree of it.”

-Thomas Jefferson

As a young man, I remember listening to my father as he spoke of the world, man, and how things worked, with a fascinated reverence for this thing called Conservatism. Awe would tighten his voice as he told of the seamless way that this ideology worked with and through the strengths and weaknesses of man. What my dad grasped, and passed on to me, is that conservatism is the only line of thinking that allows for life, liberty, and the pursuit of happiness. It is the only way for us to connect with and uphold that which the Founders had in mind. Conservatism is a deep breath. It is a pause to consider what we can glean from history and how best to apply these lessons to the situations and dilemmas facing us today. Where liberalism demands action, and action now, conservatism prescribes a tempered consideration of the past, present and the potential futures, before acting.

Liberty is at the core of conservatism. A love and defense of liberty fuels the entire philosophy. You won’t hear liberals speak of liberty very often, and for good reason. Liberty sits in direct opposition to the policies of the left. For the ideals of liberalism to be implemented, the people must willingly or unwittingly surrender an increasingly large portion of their liberty. As a matter of fact, the overwhelming majority of liberal ‘accomplishments’ are demonstrable attacks on liberty in the name of growing a ‘benevolent’ government. You see, from the left’s vantage point, you don’t and can’t know what is best for your life, so you need government to intervene on your behalf. Conservatism says that government can never know the best interests of its citizenry, or provide for them, nearly as well as an unencumbered free people can for themselves.

The fundamental differences between liberalism and conservatism pertain to the preferred size of government. Liberals: the bigger the better. Conservatives: less is more. These views have a direct causal relationship with the amount of liberty the citizens are afforded. Conservatism recognizes and encourages the goodness that man can achieve without placing faith in the mythical idea of man being inherently good. Where liberalism seeks to control and stifle people for their own good, conservatism seeks to set free and embolden people to pursue their best interests autonomously.

Conservatism looks to free market capitalism as the only historically viable economic environment for freedom, while liberalism stubbornly places its faith in systems proved fatally flawed by history. Conservatism seeks in all things to preserve the framers intent for this country to limit the size and scope of government while ensuring the freedom of the common man. The Constitution was developed to this end, and has shaped our nation into the greatest the world has ever known. Conservatism views this greatness as something to be preserved and defended against the eroding effect of liberalism’s continual creep towards socialism.

Practically, what better time than now to look at the issue of taxes? Conservatism and liberalism line up reliably as supportive of lower taxes and higher taxes, respectively. More and more, liberals are admitting that their desire to tax the wealthy is less focused on government revenue than it is on ‘fairness’ or ‘leveling the playing field.’ Conservatives advocate lowering taxes across the board, and especially encouraging small and large business growth through lowered corporate tax rates. Liberals want to exponentially raise taxes on the top two tax brackets in an attempt to, as President Obama famously said, “spread the wealth around.” But, as Dr. Adrian Rogers said, “You cannot legislate the poor into freedom by legislating the wealthy out of freedom… [y]ou cannot multiply wealth by dividing it.” The inconvenient truth here is that, historically, government revenues increase as tax rates decrease and decrease as they increase. If you continue to raise taxes on these individuals, you discourage growth, job creation, and investment. If you cut corporate tax rates, you create an environment of productivity for a flourish of businesses that provide the jobs and products that Americans depend on. In this way conservatism embraces logic, the laws of economics, and liberty in a free market society.

There are countless ways that conservatism opposes the ill-formed and damaging ideas of the left and seeks to preserve what is right and good; that which we value most, by proposing time-tested solutions that honor the laws of nature and man. Conservatism perseveres despite the disadvantages of a Republican Party that has become more betrayer than advocate, a seemingly endless barrage of mischaracterizations by a hostile press, and an increasingly entitlement-friendly society. The place in a person that takes pride in hard work, relishes freedom and demands equal justice under the law is, on some level, inexorably drawn to conservatism.

Consider Jefferson’s notion above. This is the choice between left and right, liberal and conservative, tyranny and liberty.

-Guest author Maker (from The Daily Switch) on TruPolitics.net