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Phil-osophically Speaking: January 19, 2012

Lower Tax Rates — Fewer Loopholes

Capitalism has given us the most affluent economy in world history. But it also has given us the politics of envy and the rhetoric of stupidity. That is bound to happen when 1 percent of the people have 35 percent of the nation’s income. Many people just can’t stomach the idea of the rich getting richer. It offends their sense of proportion and strikes at the heart of life’s basic unfairness. But hunting the rich is a foolhardy sport. Is it morally right to take more than a third of an individual’s income in the hope that it will improve the standard of living for others? You can take all the money of the richest people in the nation, sell all their assets and still not pay down the outstanding debt. And then what’s next?

As a nation we already have high progressive rates of taxation, the highest corporation tax in the industrial world and some 47 percent of Americans pay no income tax at all. A hundred years ago, no one paid any taxes on their income and the architects of the income tax believed that the top rate would never exceed 10 percent. Everyone avoids the real question, which is how America became so fabulously rich. It did so by investing more and producing more. Investment and risk are two sides of the same coin. Without the prospect of a healthy return, wealth burrows into hovels of low risk securities, which do not produce anything or create jobs.

Ascertaining facts, discovering historical parallels and learning the rudiments of economics can be trying and tedious. Most Americans still can’t explain why we just can’t print money; why raising the minimum wage excessively creates unemployment; or why rent control creates housing shortages. The bottom line is that you can’t create capitalism without capital. The government can spend $1 billion building roads but to do this it must first borrow or tax $1 billion from other sectors of the economy and hence lose a similar number of jobs to the jobs it’s creating. The only difference, and it’s a dangerous one, is that you see the jobs that are created but not the ones that are lost.

As with all forms of human behavior, economic investment is rooted in self-interest. The paradox is that in promoting one’s self-interest you serve the interest of others by creating employment and producing goods and products that people want more affordable. That’s how John D. Rockefeller and Henry Ford made their fortunes —- as did Bill Gates and Steve Jobs.  Cumulatively it raises the standard of living, increases life spans and creates a surplus for philanthropic impulses, which is rampant among the rich. If you took the world’s one hundred richest people and put them in the poorest country (provided their wealth is protected by property laws) that nation will be immensely better off than it was before.  

The dilemma of understanding economics is that its operations can be mysterious. In no other subject are the literate so illiterate. A meager few of the population’s brighter lights have seriously read or studied economics; this has not deterred them from speaking about it with sanctimonious authority. A critical analysis of its true effects will show that the redistributionist instinct is more emotionally rooted than intellectually based. This is not to say that intellectual pretenses have immunity to sophisticated nonsense. It took more than a century to discredit Marx; and it might take another 50 years before economists fully realize that Keynes multiplier (the idea that a dollar spent by the government multiplies faster than one spent by the private sector) does not multiply. Obama’s stimulus spending, for example, did nothing to lend credence to Keynes theory although there are holdouts, like influential economist Paul Krugman, who insists that 900 billion of government stimulus spending was too little to get the economy moving. So, I suppose, we will one day be foolish enough to carry this experiment a little bit or even a lot further.  

Certainly that would be true if Warren Buffett gets his way.  His tax rates are relatively low because taxes on income are much higher than taxes on investments. So, Buffet bloviates, like the self-righteous hot air balloon he has become, that the rich are not taxed enough. These lyrics have so delighted him it’s a wonder he doesn’t break out in verse when proclaiming it. He seems to think that because he is such a preposterously rich man, that nobility has never known greater heights than his willingness to give a few more dollars to the public weal. Buffet may have been the greatest stock picker in the history of finance, but when it comes to tax policy the “Oracle of Omaha” sounds more like the “Dunce from Des Moines.”

Raising tax revenues by raising tax rates on the rich has not worked, but the reverse has. It is a fact that the Mellon tax cuts of the 1920s, the Kennedy tax cuts of the 1960s and the Reagan tax cuts of the 1980s, the three biggest economic booms of the 20th century produced a growth in tax receipts from the wealthiest Americans. Since 1978, as economist Arthur Laffer points out, the top earned income tax rate fell to 35 percent from 50 percent and the capital gains tax rate fell to 15 percent from 70 percent. President Clinton bolstered this by nearly eliminating a capital gains tax from the sale of owner occupied homes. Before the economic collapse in 2008, the upshot was that over the last 30 years the top 5 percent of all earners saw their tax payments increase to 3.3 percent of the GDP from 1.5 percent while the bottom 95 percent saw their tax payments drop to 3.2 percent from 5.4 percent.

Of course, this net increase resulted from people’s income soaring, but then that’s exactly the point. This is not to suggest that tax cuts without spending cuts are a workable proposition. Both the debt and spending projections are far too large to entertain such chimerical notions. If political activists relied more on evidence than emotion we would have a far better chance of getting the right mix of taxation and investment opportunities. Caricatures of capitalism don’t just come from the left but lately from Republican presidential candidates whose ambitions have clouded their judgment.

G.K. Chesterton liked to carry around a sword because he liked things to come to a point. Well, my point is this: Presently, our economy is starved for investment. In that light, lower tax rates and fewer loopholes sound like a sensible plan. While most of us agree that the affluent society needs a safety net and must make provision for the poor, taking from Peter to give to Paul beyond absolute necessity is a social gospel that preaches but does not perform; in the long run it helps neither Peter nor Paul.