Everything old is new again, and old tropes, sound-bites, metaphors, and talking points never quite seem to fade away into oblivion, even when they truly deserve to do so. Their re-emergence is predictable to the point of boredom, as is evinced by the Left’s response to the GOP tax plan currently being considered by the House.
Sure enough, we automatically hear “tax cuts for the rich,” “trickle-down economics,” and “how will these cuts be paid for?” among others. All are nonsense.
First, “tax cuts for the rich” is a risible assertion. When 45% of households pay no income tax, when the top 25% of earners pay 87% of total federal income taxes, and when every income bracket pays a higher percentage in taxes than all brackets below it, then any tax cuts that are applied in a remotely even-handed fashion will necessarily benefit “the rich.” A person earning $38,000 is at the income midpoint, and on average pays $1050 a year in federal taxes, while a person earning $189,000 is at the top-5% cutoff, and on average pays $20600 in federal taxes. Give them both a 10% break on their income taxes, and the midpoint earner keeps an extra $105 of his income, while the 5%er gets to keep $2060. There is NO WAY to cut taxes for everyone and not favor the higher earners, when it is the higher earners that pay all the taxes.
Second, “trickle-down economics” was a lie invented by opponents of tax cuts. There is no such principle anywhere in economic literature. The phrase was crafted as class warfare.
Third, “how will these cuts be paid for” is one of the greatest insults to the principle of liberty and individual autonomy ever uttered. Taxes are monies collected by the government from the people who earned them, to be used to provide government services. Tax money does not “belong” to the government, and the idea that the government “pays” for tax reductions is flipping this fundamental reality on its head. NO, the government does not “pay” when it allows people to keep more of the money they earned. The idea is grotesque, and if anyone ever says it to you, call him a nasty name.
Nevertheless, and despite these three rebuttals, there will continue to be plaints from deficit hawks, both real and fake, about how tax cuts are bad, how they are unfair, and, centrally, how they will increase the national debt. To that last claim, there are two proper answers.
First, and I’ll keep this brief: The national debt is and forever will be a spending problem, not a revenue problem. Want to get out of debt? Spend less money! That’s it. That’s the answer, plain as day, simple as 1-2-3, and inconvenient enough to prompt most politicians (who get along by bestowing largesse on constituencies) to ignore it.
Second, and this is the point of today’s essay, tax cuts prompt economic growth. Economic growth generates more tax revenue, and more revenue offsets (and then some) the calculated losses based on the tax rate cuts. In fact, history provides ample proof that this happens. After both Bush tax cuts, government tax revenues increased, to cite the most recent example.
Why, then, do we hear about increases in the debt due to tax cuts? Because the government bean counters are constrained in their freedom to predict economic growth due to cuts. They’ve a mandate to calculate based on certain static assumptions and states, and this traditionally leads them to over-predict revenues gleaned from tax increases and under-predict revenues after tax cuts.
Why, then, doesn’t Congress change these rules? Because most politicians don’t like tax cuts, no matter what they say. The extremely progressive nature of our tax code, as noted previously, means that tax cuts will inevitably provide greater benefit to the “rich” who pay most of the taxes, and an agenda-driven and tendentious press will leverage this to make the politician’s life difficult come election time. Thus, even the supposedly non-partisan parts of the government are constrained by rules that leak partisanship into their analyses.
This “trap” of static thinking infests our broader mind sets, as well. There are people who fear and lament the accruing power of big corporations, but big corporations are not eternal. Only 12% of the Fortune 500 companies in 1955 remained on the list in 2015. Fears that AOL or Microsoft were going to monopolize the Internet proved thoroughly unfounded, to name but two. People have long lamented the poverty rate in America, and an ill-advised War on Poverty was declared half a century ago. The “static trap” led to that War, prompted by the fact that people didn’t recognize that, even if the poverty rate remained the same, it wasn’t the same poor people that comprised it. Upward economic mobility has long been a reality of America.
Until recent decades, sadly. The massive expansion of welfare programs has, by disincentivizing self-help and upward mobility, created a permanent underclass, one that is increasingly comfortable with simply demanding to be taken care of. Not too long ago, going on welfare was a stigma, an admission of failure on the part of a provider, and a motivation to work to do better for one’s own. The static trap in this instance went from a misconception to an actualized reality, thanks specifically to the government efforts born of the misconception.
We have ample adages and proverbs to guide us here. Change is the only constant. For every action there is [a] reaction. Elections have consequences. These and countless others reflect the twin realities that change is eternal and that external factors affect our behaviors. Politicians are schizophrenic on that last point. When they raise tax rates, they assume that people won’t alter their behaviors in response… except when they assume they will. Thus, the idea that taxing the rich some more won’t make them try harder to avoid taxes, or discourage them from engaging in wealth-creating activities, but that taxing sodas, cigarettes and other “vices” will discourage people from partaking of them. Basic economics tells us that there will be varying degrees of behavioral change (the relevant concept is economic elasticity), but since understanding this involves taking more than 5 seconds to think about it, many prefer instead to simply fall into the static trap, with unfortunate consequences for us all.
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Wonderfully put! Keep up the God Work!