The Lamentations of Lowry – Chapter 5

April 11, 2008 at 12:07 pm 4 comments

I liked the title of this editorial in the Wall Street Journal, “The Coming Tax Bomb.” I’m not so crazy about the danger it describes. Cogan & Hubbard, each part of different Republican administrations, begin their warning in this manner:

As the presidential campaign enters its final stages, there will be increased debate over budget priorities and how they will be paid for. Many commentators and political leaders, including Sens. Hillary Clinton and Barack Obama, believe that tax increases are needed to restore near-term budget balance and finance longer-term entitlement growth.

These claims fail budget arithmetic and economics. Worse, they raise serious questions about the nation’s broad fiscal policies and its commitment to economic growth.

In a recent Businessweek interview with Maria Bartiromo Barack Obama made many statements that inspired fear should he be elected. Here’s one:

What we’re talking about is going back to the tax structure during the ’90s. Rich people were still rich. But we had a more balanced budget and as a consequence could sustain economic growth. For us to roll back some of those tax cuts and put this economy on a more stable fiscal footing…that is actually good long term for our economy, for investors, and Wall Street.

What does having a balanced government budget have to do with economic growth? Nothing! The economy can and has grown with surpluses, deficits, and balanced budgets. Do I support balanced budgets? Yes, but not at the expense of higher taxes which put the ECONOMY on weaker footing. What he proposes would increase government revenues, but not lead to a healthier economy. More from Barack:

There’s no doubt that anything I do is going to be premised on what the economic situation is when I take office next January. The thing you can be assured of is that I‘m not going to make these decisions based on ideology. I’m not a dogmatist. My opponents to the right would like to paint me as this wild-eyed liberal, but I believe in the market. I believe in entrepreneurship. I believe in capitalism, and I want to do what works. One of the problems with the Bush Administration has been its rigidness when it comes to economic policy. It doesn’t matter what the problem is, they’ll say tax cuts. Trade deficit? Tax cuts. Slowdown in manufacturing? Tax cuts. At a certain point, if you’ve only got one arrow in the quiver, you’re going to have problems.

How about making decisions based on sound economic theory? I appreciate his stated intent to make decisions based on the climate if and when he takes office, but a belief in low taxes as a spur for economic growth is no more dogma than a belief in evolution as a scientific theory. Regarding the arrow in the quiver comment, there is nothing wrong with having one arrow if it works, and tax cuts are like a freaking thermonuclear arrow.

Cogan and Hubbard further explain why Obama is wrong:

Proponents of bigger government invariably argue that allowing all or some of President Bush’s tax cuts to expire is necessary in the near term to balance the federal budget, and necessary in the longer term to finance the retirement and health-care promises made to the baby-boom generation. But a tax increase is neither wise nor necessary.

As has so often been true in the past, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won’t lower the budget deficit.

Moreover, current tax rates can be maintained and even reduced and still allow for necessary increases in national security appropriations and the balancing of the federal budget. Although budget balance may not be achieved overnight, a firm commitment by the next president to spending control will enable balance by the end of his or her first term.

Obama’s economic theories are based on a static vision of the “pie.” Tax hike proponents see a finite pool of potential revenues and want to increase the size of their piece. Michelle Obama said as much in an appearance in North Carolina:

If we don’t wake up as a nation with a new kind of leadership…for how we want this country to work, then we won’t get universal health care. The truth is, in order to get things like universal health care and a revamped education system, then someone is going to have to give up a piece of their pie so that someone else can have more.

Hmmm…I wonder who will be doing the giving up. Probably rich people like me. It’s too bad that I believe that economics is not a zero-sum game. There can be (and are) MULTIPLE winners. The pie is not finite in size, but can grow. Lower taxes, let us (ME!) keep more. I will invest more, buy more, employ more. The pie grows, government revenues increase as a function of a growing pie. The more they take? The opposite occurs, and the revenues shrink.

And that’s all I have to say about that.

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Entry filed under: Commentary, Politics. Tags: , , .

I Can Hear You Now Who’s Watching the Watchers?

4 Comments Add your own

  • 1. Massimo  |  April 11, 2008 at 2:04 pm

    Adam Smith, we hardly knew you. We’re all mercantilists now! I suppose we should next take up burning witches and bleeding each other.

    Reply
  • 2. Joey  |  April 11, 2008 at 2:26 pm

    And let there be tights! And powdered wiglets!

    Massimo, you know as well as I do that the vast hordes of America’s uninsured are already resorting to bleeding and leeches.

    Reply
  • 3. lemare  |  April 11, 2008 at 9:37 pm

    No, Joey, America’s uninsured are merely COMPLAINING about the cost of leeches these days and thinking that we should help them pay for it.

    PS – Lowdogg, you make a point about us being “rich”. It makes me sick that I am considered rich when I live in a place where I can’t even afford to buy my own condo. But by all means, raise my taxes.

    Reply
  • 4. Sportsattitude  |  April 13, 2008 at 11:21 am

    I always qualify myself as a amateur when it comes to economics, but it seems to me the problem does not lie with the 50,000 foot view of “rich people not paying enough taxes,” but people who make their money via their rich companies and not acting in the nation’s best interest. If the rich owners and CEO’s of the rich companies get tax breaks and can document investing those breaks back into hiring American citizens and operating within our borders, so be it. Give ’em all the breaks they need to re-invest in their businesses. If you’re just flat-out rich, you shouldn’t have to pay any more taxes ratio-wise than the non-rich. If you’re rich directly as a result of your business or your business leadership and you fail to take tax breaks awarded to you and re-invest them in this country and this country’s citizens, then you shouldn’t get the breaks in the first place. I don’t know what the threshold is for “rich” but in this weekend’s People insert in the national newspapers where they take a snapshot of what people make in different professions, I think we can agree on some figure where the world “rich” is appropriate. Ironic how the folks who help others the most make the least.

    Reply

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