Saturday, May 10, 2008

The Problem with Taxing Success

The current economic slowing in the U.S. has left many States low on funding. They get revenue from the real estate market, which is presently down. While there are some positive signs that the economy will be doing better soon, local governments are looking for revenue.

Unfortunately, many of them simply don't get it. Among them are California and Massachusetts, the legislatures of which think the solution lies in higher taxes. Nevermind that people are fleeing the already high taxes. Massachusetts not long ago recognized a population emergency, as tens of thousands of residents left for other States. California lost 89,000 people last year in State-to-State moves, a fact neatly covered by foreign immigration from our Southern neighbor.

Massachusetts is now working on the idea of taxing Universities with large endowments. The Universities aren't very happy about the idea, of course. After all, they're nonprofit organizations! Then again, Harvard, with an Endowment of $34 billion (yes, that's billion with a B), isn't paying any taxes and though it could allow all of its students to attend free of charge for eternity simply on the interest from that endowment, isn't interested in paying taxes.

In fact, the normally liberal professors there seem to get very conservative when it comes to "paying their fair share." Kevin Casey, Harvard's associate vice president for government, community and public affairs said, "You can't do that. You'd be taxing success... And over time this would put us at a competitive disadvantage. It would hurt the state." See Glenn Beck's discussion of the subject here. The Boston Globe article is here.

There is a simple truth. Anything you tax (or punish) you will get less of. Anything you subsidize (or reward) you will get more of. Period.

If you want to reduce academic activity, tax it. If you want to reduce business, large or small in a State, tax it. If you want to reduce profits in your State or nation, tax them. If you want to stimulate anything, either subsidize it or reduce its tax burden.

Right now, major political candidates are suggesting taxing or taking the profits from "big oil" as a solution to the current oil price problem. Let's think about that approach logically. First, understand that corporations do not pay taxes. They write checks to the government, but their profit margin does not decrease. How is this accomplished? They increase the price of the product enough to offset the taxes they're required to pay. That's not a dirty trick, as one might first be inclined to assume. That is simply fulfilling the obligation they have to their shareholders to make a profit.

That's good for the average American, who is likely to have a retirement account of some sort that relies at least in part on stocks.

That means that in addition to the $0.18 anyone who drives is paying in Federal Gasoline taxes (not to mention State taxes, which add more cost), any tax the government applies to "big oil" will be paid by drivers at the pump. I'm not interested in paying double taxes at the gas pump; I'm having to adjust my budget too much already.

Many countries, including former Soviet States, have recognized these principles and imposed flat taxes at fairly low rates on their people and businesses. This actually encourages success. If I'm going to pay 15% whether I earn $30,000 per year or $85,000 per year, I'm going to go for the higher income. If I'm going to be taxed at 75% when I get to $85,000 per year, I don't have nearly as much incentive to get there.

75% may sound like a number designed to frighten, but it's not. It's an actual tax rate for the rich from America's past. The president who worked to change it may surprise you. Let me present two quotations. Think about who this might be, and then look for the answer below.

Quotation One:
It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now ... Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

Quotation Two:
There are a number of ways by which the federal government can meet its responsibilities to aid economic growth. We can and must improve American education and technical training. We can and must expand civilian research and technology. One of the great bottlenecks for this country's economic growth in this decade will be the shortages of doctorates in mathematics, engineering, and physics — a serious shortage with a great demand and an undersupply of highly trained manpower. We can and must step up the development of our natural resources.

But the most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand — to cut the fetters which hold back private spending. In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion. It could also be done by increasing federal expenditures more rapidly than necessary, but such a course would soon demoralize both the government and our economy. If government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency. And I shall say more on this in a moment.

The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system — and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes to be enacted and become effective in 1963.

I'm not talking about a "quickie" or a temporary tax cut, which would be more appropriate if a recession were imminent. Nor am I talking about giving the economy a mere shot in the arm, to ease some temporary complaint. I am talking about the accumulated evidence of the last five years that our present tax system, developed as it was, in good part, during World War II to restrain growth, exerts too heavy a drag on growth in peace time; that it siphons out of the private economy too large a share of personal and business purchasing power; that it reduces the financial incentives [sic] for personal effort, investment, and risk-taking. In short, to increase demand and lift the economy, the federal government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures.
You might think these quotations are from Ronald Reagan or George Bush. Not even close. Quotation One comes from a President's News Conference on November 20, 1962. That's right. John F. Kennedy said it. He also gave us the second quotation at an address to the Economic Club of New York on December 14, 1962, full text here.

Lowering taxes to stimulate success in the economy is not a crazy right-wing idea. Insane tax rates inspired John F. Kennedy to look at economic theory and realize that the economy is not a static system. That is, income available to tax is not always the same, such that you can raise taxes and get more or lower them and get less. If that were the case, raising taxes would make perfect sense if revenue were short.

The truth of the economy, however, is that if the government leaves businesses and individuals with more of their money, by taxing them less, they essentially "farm" it. That is, they save, reinvest in the business, and make a larger amount of it, so that even taxed at a lower rate, the government's take is larger.

For any given State, this principle is even more important. The tax base can and will move to other States if the burden becomes too great, and that's already happening in places like California and Massachusetts. People are leaving for Texas and Colorado, where taxes are more reasonable, and business is not severely punished simply for existing.

When it comes to the oil industry, it costs enormous amounts of money to explore for and extract oil these days. It's no longer easily accessible, but must often be extracted from incredible locations, like 7 miles beneath the ocean's surface. The more capital we leave them with, the more oil they can extract, and the lower our prices at the pump will be as we work toward cleaner and more advanced methods of powering our economy.

The sooner legislators recognize these facts, the sooner we'll see this economy turn around and prosperity restored to the average American.

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