More Than the Rich Will Pay on Tax Hike

Posted: Sep 10, 2011 12:01 AM

Why will higher taxes will further damage our ability to create jobs?

Nearly 50% of the people in the United States receive a government check.  As a result, Congress doesn’t have the stomach to do what’s necessary to cut spending and put our economy back on track.

They’re afraid of the inevitable political backlash.

It’s also why some in Congress suggest raising taxes on the “rich” -- there aren’t so very many of them, their votes don’t count for much.  It’s politically profitable to be generous with other people’s money.

There’s a Catch 22 though with tax increases.

In Part 1 of our Catch 22 discussion, we talked about the problem with endless borrowing -- eventually you hit a debt wall at which you must raise interest rates to attract adequate funds.  We talked as well about the problem with printing money to pay debt -- it causes inflation and destroys the standard of living. 

The Catch 22 with higher taxes is this -- at a certain point, every additional dollar the government takes out of the economy works to stunt economic growth, ruin enterprise and diminish the tax revenues the politicians need to fund their growing budgets.

Most academic economists have pegged the point at which additional taxes work to suppress economic growth at about 18% of the overall economy.  Today, the U.S. takes 28% in taxes from our economy.

Liberals, of course, dispute this fact.  They think the government can take significantly more than 18% because more revenues mean more government jobs.  The historical evidence, however, argues something very different.

Government can, of course, hire workers.  But experience shows government doesn’t create the collateral jobs a healthy economy does.

For example, when a car manufacturing plant is built, and 1,000 men and women in a community are hired to work there, a multiplier effect occurs.  The 1000 car makers eat at restaurants, dry clean their clothes, and buy new tires for their cars.  The businesses that serve them sell more products and services, hire more employees and expand to meet demand. 

Along with profits and jobs, tax revenues paid to the city grow as well.  The multiplier effect occurs because people buy the cars those 1000 new employees make. 

That doesn’t happen with government.  The government doesn’t provide jobs in a free market ruled by the principles of supply and demand.  Private capital and investment fill that need more efficiently.  

Government, on the other hand, spends money on enterprises that the market does not demand.  That’s not to say these services aren’t important, even necessary.  

An EPA inspector may be critical to assuring compliance in the manufacturing process so air and water aren’t polluted.  And, yes, that government employee participates in purchases in the market place.  But the job and his salary were not generated by a free market choice.  Taxes were collected to pay his salary.  Money was taken out of the system to support what may be an important need, but because it was paid for with someone else's money, there is no multiplier.  Government expenditures are at best neutral in providing collateral jobs. 

And no matter how critical the government service, if the government providing it takes more than 18% from the economy, growth and prosperity will fall off.   Some economists have theorized that number is actually much lower.  Milton Friedman believed the total amount government could extract from the economy and still optimize economic growth was just 10% of GDP.  

At 28% of our economy, government is already sucking so much money from the marketplace that families can’t buy cars, make mortgage payments or pay their bills.  Forget about saving for the kids’ college or a rainy day fund.  The storm is already raging and the water is rising. 

If, as Barack Obama and his friends in Congress suggest, we increase taxes to even dizzier heights, we will most certainly condemn ourselves to permanent stagnation or worse.

Despite the dearth of courage in Congress, the only way we will reverse our nation’s debt problem is to cut the size and cost of government as a percent of GDP.  It’s going to require deep spending reductions and some sacrifice by many of that 50% who receive some form of government payment.  But even that’s not enough.  It will also require reform and restructuring of how we spend tax money and what we spend it on. 

It’s also going to require the American people to toughen up and reject those who seek their votes by promising an easy way out of our debt problems by growing, borrowing, or printing.   Those options won’t work. 

We must also reject those who suggest we tax our way out of the mess they created by soaking a few rich people for the benefit of everyone else.  That will certainly penalize the wealthy.  But it won’t help the rest of us when our economy sinks still further into dysfunction.

If we do what we must - cut, reform and restructure -  we’ll grow again.  At that point, people can decide whether they want to pay higher taxes for additional programs. 

Until then though, raising taxes to grow the economy is oxymoronic.  Given the amount government already takes out of the economy, higher taxes and a prosperous economy cannot coexist -- even in theory.