Should taxes be raised?

I heard that Ben Stein recently criticized the Republicans for being so absolutist in their opposition to tax increases. Stein said certain taxes are lower now than they were after President Reagan’s tax cuts, and therefore some increases would be reasonable. Do readers think there is anything to Stein’s argument? Do the Republicans hurt themselves when they reject tax hikes even if spending cuts were ten times greater, as in their unanimous answer at last week’s Iowa debate? I understand of course that you don’t raise taxes during a recession; that normally would be enough to settle the question. But the issue here is not just the recession but the deficit. Is there a case to be made for raising taxes for deficit-cutting purposes?

But then another counter-argument immediately suggests itself: any tax increases the Democrats manage to wangle out of the Republicans will immediately be used for additional spending, not deficit reduction. I happened to be watching the cable TV political programs after the debt deal was reached a couple of weeks ago. The way Democrats spoke was most revealing. One Democrat after another frankly indicated that in his view the way to have a strong economy is not by cutting taxing and spending, but by increasing taxing and spending. It became clear that on a fundamental level the Democrats do not believe that reducing the tax burden on individuals, families, and businesses will liberate economic activity. On a fundamental level, the Democrats believe that the American society is helpless, and that only government makes it work. They think that human beings will not engage in productive enterprise, unless they have first been made secure, safe, and comfortable by a raft of government subsidies, which must keep forever expanding. This is the Democrats’ vision of man and politics. Thus what Nancy Pelosi said in 2010 in support of the health care bill—that it would free artists to create art by making it possible for them to leave their jobs without losing their health insurance—was not just Pelosi’s idiosyncratic notion. It represented the Democrats’ deeply held view of what makes human creativity possible.

Which brings us back to the question of the Democrats’ demand for (and their incandescent fury at Republicans for opposing) tax increases to cut the deficit. The demand must be resisted, because it has nothing to do with reducing the deficit and the debt, and everything to do with advancing the Democrats’ socialist philosophy.

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Stewart W. writes:

While in principle, I’m not entirely opposed to some kind of tax increase, the reality is that when you make a deal with the Devil, there’s always some kind of catch that gets you. Such is always the case when you make a deal with Democrats, and as a result, I’m very much in the “show me” camp regarding any possibility of such a compromise.

As in the recent debt limit deal, the proposed tax increases take effect in the immediate future, while the “cuts” are promised for sometime in the distant future, usually to be enacted by the next Congress, and as a result they never take effect. It’s the same with proposed “amnesty” bills. We’ll give irrevocable amnesty now, and then we promise, we’ll beef up enforcement later. Because the Republicans are fools, they always fall for such tricks, but I think many people are on to the little game now, and are having none of it.

You want tax increases? Fine—abolish the Departments of Education, Energy, Labor, Commerce, and Housing and Urban Development first. Fire 100 percent of the former employees of these departments and send them out to get honest work. Dive into the Code of Federal Regulations, and remove all regulations, directives, and guidelines enforced by these former departments, so such regulations and programs do not just pop up somewhere else. Take the money formerly spent on these monstrosities and apply it to the federal debt for five years, and demonstrate that the federal government showed an equivalent net decrease in total expenditures (not a decrease in the forecast rate of growth, but an actual decrease). At the end of that time, come back to me, and if it looks like those departments are all well and truly dead, then I promise, I’ll agree to a modest, targeted tax increase.

Until the evil Democrats are willing to take such drastic medicine, I’m not willing to be fooled again.

N. writes:

There are a lot of things to say about this, one thing is certain: Herb Stein was an intelligent man and a good economist. He could offer some deep, serious analysis. His son, Ben Stein, is an actor and a commentator. He has some enormous blind spots. I don’t take anything he says about economics all that seriously.

Glynn Custred writes:

This is very well said.

Tim W. writes:

I live in a state that has no income tax. Every time there’s a state budget shortfall, there are those who demand that we adopt an income tax. They point out that an income tax would raise enough revenue to close whatever budget shortfall there is at the time. Technically, they’re correct. But our neighboring states which already have income taxes, and have had them for decades, have the same budget crises that we do, usually worse. The reason is that the same politicians who like income taxes also like to spend taxpayers’ money. So if we had an income tax in my state, the politicians would just spend the revenue it would bring in, and we’d have the same budget shortfall next year.

The founders of our country didn’t like the idea of career politicians. They hoped our leaders would be successful men who took a few years’ leave from their profitable plantations or businesses to serve their country. They also wanted a limited franchise. They never desired the situation we now have, universal suffrage and career politicians who win re-election by offering goodies to the voters. It’s this situation that makes it impossible to get the spending under control. New taxes on the rich would just be an opportunity for these hacks to spend more money.

Mark A. writes:

The unspoken issue in all of this is the tax base. Outsourcing and “free” trade has destroyed the tax base. It gets smaller every year. Thus, a discussion of “rate hikes” isn’t quite functional without a discussion of the tax base. More than half of voters pay no income tax. Moreover, nothing will be done about taxes or spending as we have an unlimited franchise system, which always devolves into a vote buying scheme. The United States, after the destruction of its industrial base in the 1970s, has been living on credit (i.e. bonds) since Reagan’s first term.

Nothing will stop the spending until the bond market refuses to buy 30 years treasuries at low rates. The Dems are probably wiser in that they know that the cities will burn if the bread and circuses are cut off. We’re headed straight for a wall. The only argument between the Republicans and the Dems is whether we hit it at 50 mph or 75 mph.

James N. writes:

This is a very complicated matter.

I think GOP tax policy has been hopelessly corrupt since 1986. If you recall, the premise of California Proposition 13 in 1978, and the first-term Reagan tax cutting, was that this would “starve the beast,” shrinking government by cutting off the money supply.

It was a great idea, since cutting government directly had proved to be impossible. It has been proven ineffective, however, and we must learn from events after Reagan’s first term.

Since the Kemp-Roth tax law of 1986 and the Great Compromise (GOP cut taxes as much as they want, Democrats spend as much as they want by borrowing), our fiscal and monetary situation has deteriorated substantially.

I want a much smaller Federal government. But I also do not want the dollar to be destroyed.

If people vote consistently to give away trillions of dollars in benefits, and if they can’t be dissuaded, then, yes, I think they should be made to pay the bills through taxation (as opposed to borrowing from China and inflation of the money supply by printing (or, more correctly, uploading) money.

Randy writes:

Excellent summary—from one who does not consider himself knowledgeable in economic. Any amount of money that is taken from those who produce (yes, including billionaires) and is transferred to those who give nothing in return is reducing the overall wealth of an economy. The wealth created by one is now shared by two rather than the economy benefiting from the production of both. How long can a society (i.e. economy) survive when one half or one third are supporting the rest? How long would a leaking boat stay afloat if there were ten occupants but only three or four were willing to remove the water? This is the story of America since the mid 1960s-creating ever more ways for more of our unproductive population to live on the backs of those who produce.

What is worse is that when the government confiscates the wealth of those who produce, they are unable to take their excess production and parlay that into even more production—which eventually results in more JOBS. Everyone just lives a day to day existence with no opportunity for capital formation (a way for societies to be more productive and create even greater wealth—and JOBS). Eventually, the productive exhaust themselves and the economy dies. Labor is a scarce resource. Between 2:00 and 3:00 PM on a Saturday afternoon, you can either mow the grass or wash your car but you can’t do both. Does a stalk of corn just magically pop up out of the ground and find its way to your dinner table ready for you to eat it? So, when “the government” promises us a “free education” or “free healthcare” it is just a form of theft from everyone else who creates wealth. After all, we can’t take anything from a street bum. In addition, there is a limit to how productive we can be. Labor is a scarce resource as I illustrated above. So, when the productive have to share their wealth and more and more of the unproductive become dependent on being “taken care of,” it can only lead to collapse. I am sure you have heard of the analogy that parasites will eventually devour their host. This is where we have arrived today. We have reached the breaking point.

Peter Schiff’s book on how economies function provides an excellent explanation in layman’s terms (lots of illustrations in cartoon format) of these simple truths. Why don’t all those PHD’s from Harvard understand this?

One other reference you might be interested in:

“For even when we were with you, this we commanded you, that if any would not work, neither should he eat.” (II Thessalonians 3:10.)

James R. writes:

Republicans have gotten very hardline on the issue of taxes. Even Reagan raised them after lowering them. But there is a good reason to oppose tax rises, and part of it has to do with deals cut by Republicans with Democrats in the past: the taxes were raised but spending cuts never materialized. Plus, while supply-side effects can be over-estimated, it is true that tax increases never bring in as much revenue as expected.

But the main reason to be adamantly opposed to any tax increases is that they would just be dumped down the gullet of the current government, putting off reforms that probably won’t happen anyhow. Tax rises, especially of the sorts the Democrats are talking about (eliminating “Bush tax cuts on the rich” and increasing them in various populist ways on despised businesses, while they still grant dispensation to favoured ones) would be no more than a few drops in the bucket, even if it brought in all the revenue that is projected (which won’t happen): 70-80 billion, on a deficit of 1.4-1.5 trillion. There would have to be significant new taxes on everyone for tax rises to put a significant dent in the deficit, which is why there is periodic musing about the dream of a “national sales tax,” a VAT for America.

The main reason to allow any tax increases is to give the left what they want so that they don’t have a handy scapegoat. But remember that no proposal is ever so bad that it can’t be made worse by making it a “bipartisan compromise,” so that voters can’t tell who to hold responsible.

James R. continues:

Another reason the Republicans oppose raising certain taxes is that to do so as part of a revenue deal means they would be surrendering their “chips” to trade on any tax reform deal. The goal here would be to eliminate a whole bunch of tax exemptions and special deals in exchange for lowering the marginal rates, hopefully significantly. Democrats want Republicans to sign on to eliminating those exemptions now, and raising marginal rates, as part of a revenue/debt deal so that Republicans won’t have any bargaining position in tax reform.

There’s also the fact that an increasing percentage of Americans, now approaching over 50 percent, pay no taxes. And an increasing percentage of Americans not only pay no taxes but get a “tax refund” despite having paid no taxes in the first place. No one is talking of “shared sacrifice” by raising income taxes on those who currently don’t pay them, and indeed receive these tax gifts. Indeed the Democrats want to exacerbate this distortion, because it’s a way of buying votes from people who don’t (directly) share in the costs of the bloated, swollen, corpulent Leviathan that progressives has created.

Of course these people do suffer from it in a variety of ways, large and small, but indirectly, in ways that are not always obvious and which politicians can blame on handy scapegoats, thus actually facilitating their ability to demagogue things: “vote for me and I’ll not only protect you from those evil capitalists, but I’ll punish them!” (In power it never actually works out this way, progressives engage in “public-private partnerships” with the truly influential uber-wealthy, which is why the ultra-rich vote Democratic.

That said, I’m very much in favor of raising taxes on Hollywood elitists. Ben Stein’s friends will then suddenly discover the wonders of lower tax rates and how high taxes are bad for productivity. But given the kind of swill that comes out of Hollywood these days, “less is more” anyhow.

Note that even progressives who claim not to believe that higher taxes effect behavior and thus decrease economic activity don’t really believe this: just look at their attitude towards tobacco/cigarette taxes, oil/gas taxes, and the like. All of which they argue for not just on the grounds of raising revenue but decreasing some activity they don’t like.

So yes progressives are out of touch with reality in a huge variety of ways. Cognitive dissonance being one of those ways.

James P. writes:

“Should taxes be raised?” Of course not. The Democrats are fundamentally dishonest for demanding tax increases right after massively increasing spending, and Ben Stein disgraces himself by acting as their tool. Let’s roll back ALL the spending increases enacted since the year 2000, and only then would I be willing to consider tax increases.

Thucydides writes:

You have got this just right. Tax increases only serve to keep spending at higher levels than it otherwise might be. Tax increases take place right away; spending cuts supposedly will occur in the future, under future Congresses which will of course pay no attention whatsoever to plans made by the current Congress.

The way to think about this is to define the problem correctly. Liberals grudgingly acknowledge that deficits and debt buildup can reach levels that are a problem for their spending plans. The way they want to “solve” this problem is to increase tax revenues to the government.

The real problem is that spending growth is far outstripping the growth in the economy. We have promised universal entitlements which there is simply not enough income in the society to pay for. Put another way, the number of those working is insufficient to pay the taxes necessary to support seniors with a lifetime retirement income (Social Security) and free medical care. Raising taxes only ratchets up the share of national income being consumed by the government. Liberals like this—it makes the populace more dependent and creates more opportunity for political patronage.

Taxing the “rich” cannot solve the problem. This year’s deficit is 1.6 trillion(1600 billion). The total U.S. Federal income tax will yield about 890 billion. If you doubled it for everybody, it would close the deficit just for this year, but for the future, spending is growing far faster. Of course, you wouldn’t get the money anyway, as this level of taxation would sink the already fragile economy.

President Obama’s total “soak the rich” tax proposals would yield only about $80 to $110 billion per year, a mere pittance against the deficit. Obviously, his real plan is just to keep the game going by deferring any real action, which would be politically suicidal. Democrats don’t want to give up the false promise that entitlements need not change, as they see this as their key to electoral success. At the same time, their base of tax eaters lives off discretionary spending. The dilemma is that as entitlements consume an ever larger share of the budget, less is left for discretionary. There being no good answers for them, they pursue an utterly reactionary approach, hoping to keep up the pretenses past the coming election.

So far, their policy is the greatest example of “Apres moi, le deluge” seen since pre-revolutionary France.

Thucydides writes:

I think your thread on taxes has come out very nicely. There are clearly some very thoughtful people among your readers, and a number of interesting and valuable points were made.

Perhaps you might want to consider touching on economic themes once in a while. For example, it might be interesting to sound out your followers on the theme of Keynesian stimulus.

August 18

Glynn Custred writes:

I’ve been sending your article around. This is the response I got from one of my friends and my reply to him.

His Response: “The socialist bogeyman again. How tiresome this all is…. ”

My Reply: Wait a minute, Ralph. Auster makes a good point. The current debate is derived from two very different ways of looking at the same situation, thus giving rise to two different sets of policies to deal with current affairs, both in good faith. Also the perception of the Dems right now is that of statists everywhere. Those views have been often described as “socialist.” Why not simply admit it, say that some of those ideas have worked, others haven’t, but the core concept of a strong state with direct and indirect influence everywhere is the best solution to our problems, and we, as statists, are going to do the best we can no matter what the ideological framework in which we operate may be called, rather than argue that you’re something you’re not, and pointing fingers at opponents (or even at those who ask questions) and calling them names.

Howard Sutherland writes:

In addition to opposing tax increases because Democrats will inevitably squander the revenue, there is another practical political reason for Republicans to oppose them.

After giving in on so many things, Republicans have one simple, line-in-the-sand position: no new taxes! No matter how elegant a deficit reduction argument a Republican may make for tax increases, any Republican who advocates raising taxes now is DOA in national politics.

Ken Hechtman writes:

You wrote:

The way Democrats spoke was most revealing. One Democrat after another frankly indicated that in his view the way to have a strong economy is not by cutting taxing and spending, but byincreasing taxing and spending. It became clear that on a fundamental level the Democrats do not believe that reducing the tax burden on individuals, families, and businesses will liberate economic activity.

The Democrats are arguing for the basic Keynesian tax-and-spend remedy. This was mainstream economics orthodoxy from the late 1930s until the late 1970s and it’s still taught today outside the Milton Friedman/Friedrich Hayek-influenced “Freshwater Schools.”

The theory behind it goes like this: Poor people will spend nearly all of each additional dollar of income they receive while richer people will save some of it and very rich people will save almost all of it. The jargon for this is “Marginal Propensity to Consume” and it tells you how effective a fiscal stimulus is going to be depending on who receives it—the “multiplier,” in economist-speak. A tax cut for the highest bracket is the least effective thing you can do because most of it is going to be put into savings rather than spent in a way that generates new economic activity. On the other hand a tax increase on the highest bracket, combined with some form of redistributive spending, is going to put the money in the hands of people who are going to spend it all.

Posted by Lawrence Auster at August 17, 2011 08:06 AM | Send

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