Friday, May 07, 2010

Taxes on wealth creation are about "social justice," not revenue

There is an old saying, one that people of all philosophical persuasions seem to concur with, that "the more you tax something, the less you get of it." Those who support less government and more economic freedom have argued this for years. That was the reason behind the "supply side" tax cuts that proceeded periods of enormous economic growth. They came in the early 1920s, 1960s, 1980s, and at the beginning of this decade. In each case they resulted in huge increases in revenues and widespread job creation. Although "across the board," these cuts have a more immediate impact on those with higher incomes, because those are the ones who pay more in taxes. Why do these type of cuts increase revenue? The answer to that is simple -- such cuts increases taxable economic activity.

Those on the political left seem to understand the impact taxes have on an economic activity as well. One of the first things Obama did as president was raise taxes on cigarettes for the purpose of both getting revenue to pay for government programs and to discourage smoking. In fact, some in the Administration argued there would be a 10 percent decrease in the consumption of cigarettes after the tax increase. We all know this to be true, the more it costs to do something, the less likely we are to do that activity.

The founders of the US government understood this idea as well. They wrote in Article I, Section 9 of the Constitution that "No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken." This clause prohibited income taxes until the Sixteenth Amendment in the 20th century. These much wiser leaders than today believed that the government has no right to know how much an individual makes and even the sources of revenue. They believed taxes were purely for revenue and not any particular political or agendas, they merely taxed imports and did so at the same levels and at a very low rate (since government was very small in the beginning).

To tax the earnings of individuals, especially in a progressive manner in which the rate gets higher as the income grows, will eventually undermined the desire to earn. This is even more the case with businesses. Higher taxes on their activities makes them work all the harder to be less subject to the tax (rather than on the economic activities that benefits everyone). Businesses are not wood, they function with the same "fight or flight" behaviors as humans. When government causes a massive increase of taxes on those companies with 50 or more employees, like that which will come with Obamacare, they will layoff enough employees to avoid the tax. If the US decides to have one of the highest tax rates on businesses of any industrialized country in the world (it is in a battle for that top spot with Japan), businesses will either downsize or move to countries with friendlier tax environments (which are not hard to find).

Politicians get angry when businesses export these jobs to other countries. Governments know that businesses do not pay taxes, they are merely tax collectors. The government prefers to make the businesses do its dirty work. Now more than ever, businesses do not have to tolerate it and they can easily dispose of the burden by moving their activities to more profitable locations. Journalist Thomas Friedman has noted that "The World is Flat" and business can move capital with more ease and speed than in any time in history. Policy makers in Washington know this and they are casually observing and even supporting the greatest depletion of jobs we have since the Great Depression. Furthermore, as those jobs and businesses disappear, so does the revenue. It is how economies work.

This administration seems blinded by these realities because it is driven by ideas such as "social justice" and not in the creating of a wealthy and free nation. Its excessive taxes on the job creators seems to be far more personal than business. It is not about generating revenues or jobs, it is clearly about punishing those who are successful. It is driven by blind ideology and not common sense. Conspiracy theorists surmise that the Obama administration is in the process of creating more poverty, since the poor are among his primary constituents. After all, if incomes of all Americans increased and we had a significant increase in jobs creation, who would be left to support Obama's agenda? Any party that depends on poverty to succeed is dangerous to a healthy nation. This is the liberals' dilemma. If a political philosophy depends on poor voters for success, you need more poverty.

Now even the most reasonable of individuals are asking, "are these crazy conspiracy theories or painfully obvious truths?" What we know that is true is that Obama's policies are not working, unless the goal is move poverty and less prosperity.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is also host of the Price of Business (M-F at 11 AM on CNN radio). Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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