Sunday, March 1, 2009

Thoughts on the Economy

Did you ever run across an interesting item and then forget or lose a reference to it? Search as you might, you just can't remember the keywords that would ordinarily conjure it up in a search engine? I've had that happen more times than I care to recall, despite efforts to avoid just that. But occasionally good fortune smiles upon you, and something new brings it to you. I did have a bit of good fortune the other day, so I want to jot a few things down.

The item I was searching for was a chart in the article You Can't Soak the Rich.
[You Can't Soak the Rich]
The chart nearby, updating the evidence to 2007, confirms Hauser's Law. The federal tax "yield" (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% to the present 35%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.
Mentioned in the WSJ article, the Laffer Curve might be quickly explained in this video I found here:

Thomas Sowell helps break down "the rich" a bit in his article, Who's Rich?
A number of other rich people have at various times likewise declared that they do not need what are called "tax cuts for the rich." But, whatever political points such rhetoric may score, it confuses issues that are long overdue to be clarified.

One of the most basic confusions is between income and wealth. You can have high income and low wealth or vice versa. We have all heard of athletes and entertainers who have earned millions and yet ended up broke. There are also people of relatively modest incomes who have saved and invested enough over the years to leave surprisingly large amounts of wealth to their heirs.

Income tax cuts apply to income, not wealth. So the fact that some rich people say that they do not need a tax cut means nothing because they are not getting a tax cut on their wealth, since their wealth is not being taxed anyway.

Looked at differently, high tax rates hit people who are currently earning high incomes -- usually late in life, after having worked their way up in their professions over a period of decades. Genuinely rich people who have never had to work a day in their lives -- people like Congressman Kennedy -- are unaffected by income taxes, except on what they are currently earning, which may be a tiny fraction of what they own.

In other words, soak-the-rich tax rates do not in fact soak the rich. They soak people who are currently earning the rewards of having contributed to the economy. High income taxes punish people for becoming prosperous, not for having been born rich.
The wealthy can elude taxes; they always have, they always will. Some might just choose to take their business elsewhere. The real question, to me, are:
  • In this economy, why is Obama trying to Soak the Rich!?
  • Won't that just drive us further to the right on the Laffer Curve, decreasing tax receipts and increasing our debt?
  • And all done by way of the massive 'stimulus' plan which is already increasing our debt?
When you find yourself stuck in a hole, aren't you supposed to stop digging?

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