Since the beginning of government, the ambition of those who spend money has rarely been matched by the ability of citizens to pay for government. Modern day America, California or Greece are not exceptions to the rule, just examples of yesterday on a more grand scale today. As perpetual as that problem is – so too is the argument over the best way to raise tax revenue. In simple terms, lower tax rates produce a more vibrant economy and higher revenues over time. Higher tax rates do the exact opposite. Heading into 2012, the Country cannot afford for Republicans to lose that economic argument.
The issue of taxes produces perhaps the greatest display between real politics and false economics. Politicians throughout time have passed laws claiming to raise taxes. In truth, politicians pass laws that raise tax rates. That is a political process. From there, the laws of economics take over.
In general, throughout all time, people adjust their behavior in reaction to political laws by acting in accordance with economic laws which are driven by human nature. So if the penalty for speeding went up to $5000 per ticket – the number of people who speed would be reduced. If the penalty for making income increases, i.e. taxes, rises – the amount of income actually made or reported will be reduced over time as well.
Today we are faced with astronomical deficits nationally and in many states. The debt repayment obligation for California next year alone is larger than the budgets of 21 states. What should governments do? Should they politically raise tax rates? Or should they economically lower rates? The answer is the latter and if Republicans (1) fail to make the argument why in 2011 and 2012, as this article implies they will, Grover Norquist, Tom Coburn duel over tax hikes , and (2) don’t stop simply saying NO to so-called tax increases, then Barack Obama will be reelected.
Consider this argument for cutting tax rates to raise revenue:
“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
Or perhaps this argument:
“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.”
Those were strong economic arguments which were made to politicians by John Maynard Keynes and John F. Kennedy. Of course, after the Kennedy tax rate cuts were put into effect in the mid 1960’s, the economy jumped an average of 6% for three years and revenues climbed over 60%. Harding and Coolidge, Reagan and Bush 43 had similar results.
Since the arguments of Keynes and Kennedy were based on the laws of economics, they apply today as they did in the 14th century when an economist made this comment: “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
As America attempts to deal with its massive state and federal deficits, certainly all government must cut spending dramatically. As for the revenue side of the deficit equation, in these difficult economic times, it is simply irrational to economically think raising tax rates will raise more revenues over time. If Republicans don’t get that economic message right, American will be one step closer to the end of their political dynasty.