Tuesday, September 18, 2012

CRS Says What?: 'Tax Rates Don't Matter When It Comes to Economic Growth!'

'Tax Cuts for the Rich Don't Work!'
The non-partisan Congressional Research Service just came out with a report that is sure to make its way into the presidential debate this year so you better read it soon:  'Taxes and the Economy: An Economic Analysis of the Top Tax Rates from 1945-2012'

In it, the author claims: 'The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.'

In other words, he is saying: 'tax cuts for the rich don't spur economic growth but they do make rich people richer' and by implication, 'poor people poorer'.

This report is loaded like a stick of dynamite so be careful how you use it.  Either way.

First of all, taxes are not supposed to be used to affect social policy.  Taxes were viewed by our Founders in 1789 for one purpose and one purpose only:  'How are we going to pay for this new federal government we just created?'
'We have got an army to supply, a navy to build.  Roads and post offices have to be built.  We have to pay for these new judges in the judicial branch that we really don't know exactly what they will do yet. (3 Supreme Court Justices resigned from their lifetime appointments in the first 12 years of the Republic because they were bored with the job).
How are we going to do that?
Consumption taxes in the form of excise taxes on imported goods, that is how they did it.  That is also how the young Republic funded most if not all of their funding needs for most of the first 60 years of existence.

You think the Founders thought higher taxes imposed on therm by King George III retarded their economic growth? Sure they did!  They fought a war over it to get away from onerous taxes imposed on them without representation.

Today we have taxation....with representation!  So go figure that one out and report back to us if you can.

Anyway, the Young American Republic grew and within a period of less than 100 years of existence, became the most powerful world economy and supplanted even mighty Britain and France after the Industrial Revolution.

One common theme?  Low and consistent tax rates that businesses could plan on and take into account for future planning. The income tax was tried during the Civil War to pay for Union troops but was declared unconstitutional before the 16th Amendment was passed in 1913 making income taxes constitutional.

So the 'highest marginal income tax rate' had absolutely nothing to do with the first 100 years or so of exceptional American economic history, right?  Cause there was none.

Fast forward to the latter part of the 20th century, circa 1970 or so. The American economy had grown infinitely more complicated and dynamic than in the late 19th century with a lot more moving parts from the government side of things at least:  EPA, OSHA, ERISA..you put several letters together and you could name your own federal agency it seemed.

Tax policy came to be seen more as a 'social tool' to influence behavior and fairness in America than paying our collective bills somehow.

'We want more people to own homes!' (hence the mortgage deduction which affects the tax code, doncha know?)

'We want more rich people to pay their fair share!' (this debate has been going on since time immemorial but especially since the robber baron trust-busting times under Teddy Roosevelt...who was no pauper himself coming from the wealthy Roosevelt clan)

'We want to let Hollywood movie companies write off the first $15 million of their production costs immediately instead of amortizing it over a period of time because...well, because Hollywood actors and filmmakers gave us $100 million in campaign contributions last year at their swanky Beverly Hills homes!' (truth be told)

Here's an argument we never hear opponents of tax cuts bring up:
'If taxes don't affect personal or economic behavior, then why do you want to always raise taxes on cigarettes, alcohol and 64 oz Big Gulp sodas as they just did in New York City under Mayor Bloomberg?  If you want to get 'less of something', don't you raise taxes on that item or activity to help speed its demise?'
What we don't understand is why applying that same logic to income tax rates doesn't ring true as well:

'If we apply higher taxes to producers of economic growth, won't we get less of it?'

You really can't have it both ways, now can ya?  I mean, really, c'mon. Taxes either affect someone's behavior or they don't, plain and simple.  Which is it?

And is 'less economic growth' what we really want right now when 23 million people are un/underemployed in America right now?

Read the report for yourself and see what you think.  We acknowledge there are tons of things that go into economic growth and success, inflation expectations, technological developments and direct competition to name just three of them.

But we think we need to reset the entire tax system in America and return to the days when raising taxes, a set in concrete sole Constitutional duty of Congress, was done to raise money to pay for our government, not the million other reasons why tax hikes or cuts are considered today.

We think a return to a straight consumption tax with some allowances for lower-income folk would alleviate a lot of problems we face with inequities in the current income tax code and would even affect our campaign finance practices (no loopholes to defend...no reason to spend a ton of money protecting them, yes?)

You are going to be hearing a lot about this CRS report we think.  You ought to read it first.

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