We’re not broke. The rich simply aren’t paying enough in taxes. Over to you, Al Franken.
E.J. Dionne’s “What, me worry?“ opinion of America’s federal and state budget problems should frighten anyone who has had the misfortune to prosper through hard work or wise investment. Arguing that those who claim “we’re broke” are crying wolf, Dionne uses economic idiocy and moral travesty to aid those whose goal is to keep as much taxpayer money as possible flowing through the grasping hands of government, the long-term consequences be damned.
Imagine a man, the breadwinner for his family, who loses his job. He has enough in savings to cover his mortgage, country club membership, utilities, food, and payments on four cars for three months. Is he broke today? No. Is he about to be broke if he doesn’t dump the country club membership and two of his cars, and start eating at cheaper restaurants, at least until he gets a new, and hopefully stable, job? Absolutely.
Under Dionne’s analysis, however, that man is fine because someone else hasn’t lost his job. It’s the same thinking a mugger might have.
According to his analysis, Wisconsin isn’t broke because “employees and bills are being paid” and the U.S. isn’t broke because it can still borrow money at low interest rates. Dionne is whistling past the graveyard of government budgets, bringing out the Keynesian and Progressive zombies there entombed.
The U.S. can borrow at low interest rates because the Federal Reserve is spending the better part of a trillion dollars in “QE II” to “flatten the yield curve” (causing long-term interest rates to drop so the spread between long and short rates narrows, thus forcing investors to take more risk rather than save money or buy bonds.) And that’s on top of a couple trillion more the government has forced into the financial system in the past two years. Those actions are exacerbating the consistent weakening trend of the U.S. dollar over the past couple of years, risking inflation and lessening the wealth of all Americans in a way that most, who don’t think about currency rates daily — or even yearly — don’t recognize.
The federal government can get away with these damaging shenanigans because it can print money and cover up its mistakes by taking more of your (or your child’s future) paycheck. In that sense, the federal government won’t technically go broke — but it can sure seem like it has when exploding entitlements and interest payments consume 100% of tax revenue — projected to happen within 30-40 years if we don’t reform Medicare, Medicaid, and Social Security. This will leave Big Brother to borrow all the money needed for national defense, infrastructure, and politicians’ undying love of bridges and highways with their names on them.
That borrowing means nothing more than taxes to be imposed on our children and grandchildren once the current scoundrels are safely in retirement after having hooked the nation on the narcotic of “free money” and scurrying away once their supply (of other people’s money) dries up.
States are in a different situation. They can’t print money and generally must balance their budgets. When Wisconsin expects a $3.6 billion budget deficit over two years, it must be closed by spending cuts, entitlement reforms, and revenue increases. Entitlement reforms are needed most, with one analysis suggesting that half of the state’s budget deficit is due to the cost of Medicaid.
But, Dionne and his Progressive fellow travelers see tax hikes and “soaking the rich” as the only policy change needed to solve all our fiscal ills. Dionne approvingly quotes comedian-turned-political-joke Al Franken’s description of the income growth of America’s top earners as “unbelievable” and concludes that governments are not broke because “some people are definitely not broke.” What’s yours is mine, after all.
The left’s inclination to make our income tax system even more “progressive,” which is to say even more punitive of success, ignores several key facts:
First, the tax cuts passed under President George W. Bush gave our nation its most “progressive” tax system in modern American history, with the share of taxes paid by the top 1% going from under 34% in 2001 to over 40% in 2007, before dropping to 38% in 2008. (The economic turmoil of 2008 and 2009 hit the taxable incomes of upper earnings in the reverse of the prior years’ growth of their incomes that Franken and Dionne bemoan. I wonder if they feel better now that the rich are less rich.) The top 5%, earning about $160,000 a year or more, pay about 59% of all federal income taxes, up from 53% in 2001. And the bottom 50%’s share of income tax payments has fallen from 4% to 2.7%.
Second, “Hauser’s Law” suggests — though not without skeptics — that the share of GDP which the government can collect in tax revenue falls within a narrow band centered roughly around 19% for the past three decades. So, similar to the Laffer Curve’s concept of a revenue-maximizing tax rate, Hauser’s Law posits that raising tax rates won’t substantially increase tax revenue.
Third, and related to Hauser’s Law, is the fact that, as Alan Reynolds of the Cato Institute notes, “squeezing…a tiny sliver of taxpayers who already pay more than half of all individual taxes…won’t work. It never works.” Reynolds goes on to explain that “successful people are not docile sheep just waiting to be shorn” and how the non-sheep can and do change their investment and income structures to avoid punitively high tax rates.
Fourth, as President Obama’s recent chief economic advisor, Christina Romer, showed in a paper she wrote with her husband, “tax increases have a large, rapid, and highly statistically significant negative effect on output.” More specifically, “Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.” To be fair, the Romers argue that tax hikes implemented to lower a deficit have less negative economic consequences. However, history shows that tax hikes implemented to cut deficits inevitably lead to higher spending and higher future deficits. Thus, financial markets and entrepreneurs’ “animal spirits” will not react to any tax hike as if it will actually reduce the deficit.
Fifth, every bit of economic history, including our own nation’s recent self-destructive spending binge, suggests that the “multiplier” on government spending is less than one. In other words, every dollar that the federal government spends raises GDP by less than $1 because that money was taken from the private sector where it would have been more productive. Many studies by “Chicago” or “Austrian”-school economists suggest the multiplier is a substantially negative number, with the most anti-Keynesian report claiming that $1 of government spending reduces GDP by $3.40.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
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