Wednesday, April 13, 2011

Liberal Solutions on Deficit Same as Always: Just Raise Taxes

I'm putting a time-stamp on this particular post. It was completed and published at 10:05 am on Wednesday, April 12th.

Note this is before President Obama has even given his speech on how to reduce the deficit.  This is before the media "inside info" saying Obama would propose increasing taxes.  If I'm completely wrong and this isn't what the President proposes, I'll post a retraction, but I wouldn't hold my breath for it!

Liberal Democrats are bringing up the same old solutions they have always brought up to solve the deficit crisis: raise taxes on the rich.  Raise your hands if you are surprised.  If your hand is in the air, I've got some oceanfront property in Idaho to sell you. It's the same tired rhetoric that's been used for decades.  It's never reduced deficits long term and it's never increased revenues long term.  It won't this time either.

Liberals are fond of assuming a static reaction to tax increases and tax cuts, that is assuming that individuals will not change their behaviors one iota when faced with higher taxes.  (For those of you from Palm Beach County, FL, that means individuals will continue to spend the same, continue to employ the same number of people and continue to produce the exact same amount of product with their businesses without adjusting the price of those products.)  It absolutely never happens.  In a previous post I demonstrated what really happens when taxes are raised on producers (that's people who own businesses for those of you from Palm Beach County). (1)

It's a losing proposition for America.  It's taking venture capital away from those who own businesses, which usually means less jobs at best and at worst those businesses moving overseas to another country, thus setting the tax revenue received from that business at $0 per year (instead of whatever they are paying now) in addition to all employees losing their jobs (and the government losing their tax revenue).  So if your goal is to raise new revenue, raising taxes is detrimental to that goal!

So what do you do to raise new revenue?  Believe it or not, the answer is to cut taxes!  Don't believe it?  Here's some historical evidence.  Thanks to The Heritage Foundation for these facts:

- In the 1920s, top marginal tax rates were cut from 70% to less than 25%.  Gross tax receipts increased from $719 million in 1921 to $1164 million in 1928, an increase of more than 61% in revenue.

According to then-Treasury Secretary Andrew Mellon:

The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.

- During the Great Depression, Presidents Hoover and Roosevelt combined to raise top marginal tax rates to 90%.  President Kennedy reduced taxes across the board, dropping the top marginal tax rate from 90% to 70%.  Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62% (Adjusted for inflation, a 33% increase).

According to President John F. Kennedy:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits.  In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

- In the 1980s, President Reagan cut the top marginal tax rate from 70% to 24%.  Tax revenues increased from $244 billion in 1980 to $446 billion in 1989, an increase over nearly 100% (Adjusted for inflation about a 50% increase). (2)

According to then-U.S. Representative Jack Kemp (R-NY):

At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.

Note: The entirety of the previous section, save for where otherwise noted, was compiled with information from the Heritage Foundation (3)

If the goal of President Obama and the Democrats' fiscal policy is to raise revenue, history demonstrates quite clearly that they should cut taxes.  They should cut taxes to ensure higher revenue.  I have given three examples on a national level of cutting marginal income tax rates to achieve higher revenues. These are historical facts.

Look back at the quote from Treasury Secretary Andrew Mellon.  He noted that the rich would find ways, usually legal, to pay less in taxes when the rates are confiscatory. These loopholes cannot be permanently closed without reopening another, because laws are created by human beings and human beings are completely fallible. It always happens.  Democrats cannot legislate it away.

Furthermore, aside from attempting to legally sidestep paying taxes, there is absolutely zero way to force people to continue spending money at the same rate when more of their income is taken away in taxes. Go back to the original post I penned on Liberal tax policy (1).  Business owners have a particular percentage of profit that is required for them to consider it worth the financial risk of investing their money in their business. Once the profit margin becomes below that acceptable reward for the risk, those individuals will find a way to adjust their business to put the projected profits back at that acceptable reward for the risk.  This is done by either laying off employees and cutting production, raising prices, moving the production of their products to another nation where tax policy is more reasonable, or a combination of the above.

Business owners (and people in general) are simply not going to do things detrimental to their own self interests so that government can continue to spend wildly.  Nor should they be reasonably expected to do so.  No matter how often Liberal Utopians (usually Neighborhood Liberals) start telling us that the rich should be willing to do that "for the greater good," it's not going to actually happen.

Even if they were willing to just pay more, Liberals have shown over many decades that they will find a way to overspend proportionally when their tax revenues increased.  For example, under Reagan, when tax revenues were doubled, Democrats still spent $1.80 for every $1 received in tax revenue.  Think about it.  If you subscribe to the idea that the government at that point needed to have 80% more revenue to successfully operate, and they received 100% more in revenue, it should stand to reason that the government would then have a 20% surplus, right?  It didn't.  Instead, the government ended up STILL spending 180% of whatever was received in taxes, leading to higher deficits because 180% of $153 billion ($122 billion in deficits) is more than 180% of $93 billion ($74 billion in deficits).

So the deficits more than doubled even though the revenue was increased enough to more than cover the previous deficits.  Clearly the problem isn't lack of tax revenue.  As Ronald Reagan said, "We don't have trillion dollar deficits because we tax too little.  We have trillion dollar deficits because we spend too much."


(1)  Reality Check: Liberal Tax Policy Has Not and Will Not Succeed

(2) The Reagan Tax Cuts: Lessons for Tax Reform

(3) The Historical Lessons of Lower Tax Rates

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