Despite the Washington rhetoric mostly for public consumption, the Democrats and Republican are joined at the hips. The once proud fiscal-responsible Democratic Party took a sharp left turn in 1932 with the Roosevelt. Then in 1971 under Nixon the Republicans joined the democrats to advance the Welfare-Warfare state and trash the Constitution. Remember it was Richard Nixon who said “we are all Keynesians now.” Both parties agree that the most urgent task is fixing a slumbering economy but neither seem to understand what makes it tick. There is no better example than the craziness of the Joint Committee on Taxation (JCT), a nonpartisan agency that assists Congress in determining tax rates and making government revenue projections.
Senator Bob Packwood of Oregon in 1989 wrote the JCT and asked them to do an estimate for him how much money we could raise if we confiscated all of the income of those who made above $200,000. The JCT responded with a chart of projections: $104B would be raised in 1989 and climb each year up to $299B in 1993.
Packwood shot back, “Wait a minute. Do you mean to tell me that even with a 100-percent tax rate you think we will keep getting these increased quantities of money?” The JCT sent another letter reiterating the same projections but this time added a new footnote … “these estimated taxes do not account for any behavioral response.”
You can’t make this stuff up. The JCT use of the grossly inaccurate “Static Scoring” to make revenue projections spotlights the flaw in Keynesianism practiced in Washington the last 80 years and taught in most universities. On the contrary, economics is entirely about human behavior, not just number-crunching.
Putting aside Washington gobbledygook let’s turn to the more credible “Dynamic Scoring” to show how tax policy determines government revenue and tangentially the effects on the private sector job-creation. This is complicated so progressives might need help in grasping it. Austrian economists who truly understand national economics and have provided mountains of empirical and theoretical evident to show how it works: As government increases tax rates from zero to about 25-30 percent, though people don’t like taxes, government revenues still increases accordingly. However, the revenue growth at 35-percent is much smaller than the growth at say 15-percent. And at 40-percent tax rate any change up or down has virtually no effect on how much revenue the government takes in. But then when the tax rate exceeds 40-percent, total revenues dramatically fall off.
The reasons are quite clear. When tax levels become abusive human nature intervenes. Individuals and businesses will explore tax-avoidance strategies, loopholes, wage reduction, labor reduction and other means. Even John Maynard Keynes wrote, “... taxation may be so high as to defeat its object… a reduction of taxation will run a better chance than an increase in balancing the budget.” Apparently Washington missed that.
Current tax rates for those who pay 95-percent of all federal, state and municipal taxes is about 45-55 percent. This on the wrong side of the curve for a healthy economy, i.e., any tax-hike at this level what-so-ever would further ruin the economy while reducing government revenues for an already overburden bureaucracy. Obama has it exactly backwards. His prescription for higher taxes is a recipe for job-killing and skyrocketing unemployment.
But reversing course and moving tax rates back to the other side of the curve would have dramatic effects on the economy. There is no better proof than what happened when President Reagan dropped the 70-percent rate under Carter down to 28-percent. In 1980, the Carter Treasury collected $19B. But in 1988 when Reagan dropped the rate to 28-percent, reportable incomes increased ten times and revenues jumped to $100B, five times as much.
Thus a sound plan to get the American economy back on track, reduce unemployment to pre-Obama levels and wipe out a mounting deficit is the following: (1) pass a across the board flat tax around 15-percent (democrats love equality except when it comes to taxation); (2) trim down government by abolishing number of boondoggle and outmoded agencies; (3) repeal business–crippling ObamaCare and (4) abolish tons of government regulations which thwart job-creation. There are over 10,000 buried in ObamaCare most of which have nothing to do with medicine.
Then after fixing the economy, there is the problem of an out-control deficit. There simply are not enough places to cut spending as the GOP want. Indeed this problem requires raising revenues, but raising revenues by increasing taxes as the democrats want would wreck a fragile economy
Instead, the above plan would encourage business investments to expand production putting millions of workers back on the tax roll. Every newly created job would raise thousands of dollars in revenue compared with every dollar of new taxes.
Progressives will snicker and refuse to budge from the archaic “Static Scoring” method. First, “Dynamic Scoring” is more difficult and further, Static Scoring tends to grow government faster. For example, bomb-thrower Rachel Maddow of MSNBC, the most biased and dishonest channel on Cable, attempted to trash Austrian economics. Her source was none other than George Bush the senior who called it “Voodoo economics.” Bush didn’t know any more about economics than does Obama. Thankfully, Clinton and Gringrich saved the nation from Bush economics.