Saturday, July 25, 2009

Killing Prosperity

About a week ago on a Fox News panel discussion about the ineffectiveness of the stimulus package, Bill Kristol made the observation that for the cost of the bill, the payroll tax could have been suspended for all working Americans for a full year. Such a measure would have had a far greater stimulating effect on the economy than that disaster that was rushed through Congress in February. In response to Kristol, Juan Williams invoked "the failed policies of the past" line. Anytime someone proposes tax cutting as a tool to repair the waylaid economy it's met by leftists with that boilerplate retort. Kristol wasn't suggesting a "tax cut for the very rich" (another liberal mantra), but relief from the mandatory, non-progressive, income reducing deduction that hurts the poor disproportionately. But even beyond this, the Bush tax cuts (assuming that's what Williams, et al, mean by failed policies), did not fail. The table above (values in trillions of dollars) shows that from 2003 when the tax cuts took effect, through 2007, revenues increased to an all-time record of almost 2.6 trillion dollars, a 44% increase. Anytime you hear a liberal decrying how "the poor" or "the children" or "single mothers" were hurt by the tax cuts, keep that in mind. There was plenty of money available.
The tax cuts were the reason the economy recovered so strongly from the triple blows of the 2000-2002 recession, the dot com implosion and the 9/11 attacks. We had four years of solid growth accompanied by the longest period of uninterrupted job growth ever.
The deficits in the Bush years were due to an unprecedented explosion in government spending. (We're now witnessing a thermonuclear explosion). Even with all the government largesse, the deficit had been decreasing until the (government inspired) housing bust cratered the economy. It had dropped to $161 billion in 2007 or just over 1% of GDP. Deficits are projected to be in the trillions for the forseeable future or nearing double digits as percentages of GDP. Yet Obama's apologists are spreading the mendacious claim that the deficit problem began with Bush.
Low tax revenue enhancement makes sense when one considers the graph above illustrating Hauser's Law. This rarely cited set of data teaches that revenue as a percentage of GDP (remarkably!) has no correlation with marginal income tax rates. Since low marginal tax rates invariably lead to economic growth one would expect tax cuts to produce higher revenues.
Fred Barnes writes in the Weekly Standard that Obama seems economically illiterate not to understand the powerful potential of tax incentives for growth. I think that Obama probably understands this, but doesn't care. With a statist economy to be put into place, with all the perks available to its administrators, an insignificant item, diminished prosperity, needn't interfere.

Statistics can show the big picture (or deceive) but anecdotal evidence is sometimes more compelling. Here's a letter appearing in today's WSJ.
Regarding your editorial “The Small Business Surtax” (July 14): President Barack Obama, Rep. Charlie Rangel and Speaker Nancy Pelosi have decided that the best way to prosperity, equality and the utopia of universal health coverage is to tax the rich just a little more.
They miss the point. The rich pay little in taxes. It is the people who are trying to get rich that carry the heaviest burden. They are the very people with the drive, willingness to sacrifice, and intellect to create wealth. Once you have capital, it works for you. When you are working for an income, which you hope to invest for continued wealth generation, you are taxed to death. Warren Buffett pays 15% on his increases, I pay over 40% of my income in taxes and the president has decreed that it must be increased closer to 60%. Here is why that is a very bad idea.
When Ronald Reagan lowered taxes, I was a young physician just entering practice. Being used to a much lower standard of living, I took the savings from the tax cuts and invested in a small software company for medical imaging. It took 12 hard years of investment before the company could stand on its own. It now employs over 100 people in high-paying careers and exports all over the world. Under the punitive tax rates contemplated by the Obama administration, I could have never begun this business, and our economy would be many millions of dollars poorer.
Over the years I have reinvested its meager earnings to continue its growth in a very capital-intensive enterprise. The accountants tell me I am making money and therefore owe a lot in taxes, but it doesn’t come back to me. Rather, it is reinvested in the company. Like many small businesses, family enterprises and farms—the very backbone of American enterprise—I am rich on paper, but cash poor. I am still driving a 1998 Yukon with more than 207,000 miles on it. My employees drive better cars, in many cases live in larger homes, and recreate with larger boats.
So how can I afford to pay more in taxes? It is very simple. I will employ fewer people, and grow the company slower, if at all. When the layoffs occur, I will begin with the people who have “Obama” stickers on their new cars in the parking lot. Then they can all go down to the welfare office and apply for their government-supplied health insurance, which I am sure will be better than the 80/20 private plan we provide.
Wendell A. Gibby, M.D.American Fork, Utah

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