Taxes, the Economy, and Solving Problems

There is a mind-set that any problem at large in one's society should be addressed with new laws establishing new redistributions of income either through taxes or by mandating required actions. Often these problems are viewed as righting an inequality, though with the elevation of environmentalism into a religion, especially among those formerly of the socialist political spectrum, drastic new programs and taxes are being proposed simply to punish human beings for exhibiting the ability to make the world a better place for human beings. Actually, government and tax policy has long been about punishing human beings for exhibiting productive ability. Those with ability seem to earn more envy than appreciation from a plurality of voters.

What is the rational approach to determining the scale of government and taxes? It has long been clear that minimizing both provides maximal freedom, maximal creative and productive output, and allows people ever-increasing resources to devote to human problem solutions. But this is not a viewpoint people keep clearly in mind as they approach any given problem. This rational, principled perspective is usually lost when it is most needed.

As I have noted several times, one of the undoubted reasons for the present economic slowdown has to be the uncertainty that businessmen have to have about future tax rates in the United States. Many business investments have payback periods extending many years into the future. They require a great deal of capital being invested over the course of a year or two or more, which is justified only if a profit can be reasonably anticipated from the investment over a number of years after the losses of the first year or two. Some investments have a shorter payback time, but very many require years. Consequently, with the Bush tax cuts expiring in 2011, businesses must be worried about their calculations on anticipated net income for investments being made now and next year. With the Democrats in firm control of the Senate and the House of Representatives and the expectation that they will strengthen their grasp of power in those bodies in the 2008 elections and grab the Presidency with a far-left socialist radical, businessmen have to be figuring that future taxes will be heavier than they are now. This rules that many investments that would have been profitable with present tax law, will not be profitable with the expected tax increases. Companies respond by buying fewer capital goods than they would have and by hiring fewer new employees.

It is simple. The calculations on any given investment decision are anything but simple, especially given that one does not know what the future tax structure will be and what future mandates will exist. This uncertainty is always present to too large a degree with activist, expanding government. But with an activist socialist presidential candidate whose stated program is "Change you can believe in", uncertainty is at a maximum. Then there is the huge power grab over most every aspect of our lives represented by the Warner-Lieberman Energy Security Act's crushing fuel taxes and their uncertain administration. Only idiots would not refrain from making many investments in this climate. That this climate of uncertainty (climate change?) depresses investment is what is very simple to understand.

So, let us examine a commentary by Ed Feulner, President of the Heritage Foundation, on some aspects of our tax policy and its effects. Five years ago, key provisions of the 2001 tax cut were accelerated to take effect in 2003, including doubling the child tax credit to $1,000, ending the marriage penalty, expanding the earned income credit for married joint filers, a new 10% tax bracket for low-income taxpayers, reduced marginal tax rates for other income brackets, the top capital-gains tax rate was cut from 20% to 15%, and the tax rate on dividends was reduced from as high as 39.6% to 15%. The result was that the economy added jobs every month from August 2003 until January 2008. 8 million new jobs were created and economic growth rates more than doubled.

In the static economy mindset, the tax cuts reduced taxes by $1.3 trillion from then through the end of 2007. But actually, because the economy grew so much more and investors could invest more wisely with lower tax rates, the government collected more tax revenue, not less. In 2003, federal revenues were 16.1% of GDP, but by 2006 they were 18.6% of a larger GDP than we would have had with the original higher tax rates! With lower tax rates, Federal government tax revenues increased from $1.77 trillion in 2003 to $2.41 trillion in 2006. This is a 36% increase in Federal revenue in 3 years! Despite that huge increase, Democrats act as though government was starved for money to spend on essential programs.

It is a marvelous thing when you can have a tax cut that leaves more money in the hands of the people and at the same time gives more money to the government to tackle such issues as it should, or more likely that it should not. This additional money paid for the war in Iraq and Afghanistan and many, many unsound Congressional giveaways. There were other effects also. The top 5% of income earners paid 59.7% of all income taxes by 2005, which was the highest % paid by that group since such records were kept in the mid-1980s. The cut in the double-taxation capital-gains tax resulted in a doubling of capital-gains tax revenues.

So, why would Democrats want to end the Bush tax cuts? It sure is not so that they will have more tax revenues to help the poor and the disadvantaged with. No, it is purely for demagogic reasons. They wish to pose before an ignorant public as the champions of the poor and the disadvantaged by piling more taxes on those who are already paying the vast majority of income, capital-gains, and dividend taxes. If they really were champions of the poor and disadvantaged groups, they would leave these tax cuts in place.

Worse yet, many of them back the Lieberman-Warner carbon tax bill which will raise taxes still higher and produce huge uncertainties for business planning. It will give Congress hugely greater power and give them many more opportunities to milk money out of lobbyists for all the groups who use energy and want special exemptions, energy credits, or who want alternative fuel and energy efficiency development monies. What a bonanza of power for Congress, while the people suffer economic stagnation and the end of many of their dreams. How many diseases will not be cured, how many products that enrich our lives will not be developed and produced, how many homes will not be bought, and how many jobs will be lost in America to India and China where a carbon tax will rightfully not be adopted?