There are many arguments about what the Government should fund and what it should not. I’m not making that particular argument from this post, although it may naturally follow. I think that once we’ve decided what we need to fund, which is a separate argument, the question becomes, how do we efficiently gather the funds in such a way as to preserve our freedom and continue to provide incentive to produce?
There are two paradigms at work here.
1 – We need to tax at the rate that funds whatever services are necessary, as determined by the people through our representatives.
2 – We need to tax at a rate that’s “fair” to all. This is where the real debate seems to occur, but does not always occur logically.
I think reasonable people can and will debate, based on their worldviews, what services are necessary, but within that context, the state should levy taxes in such a way that they provide the right amount of revenue to fund the services.
What gets obfuscated in the quest for power, in my opinion, is what actually happens to revenues to the government, and share of the burden whenever tax rates are adjusted up or down. It is not intuitively obvious. Some have heard of the “Laffer Curve” and its concepts; most have not. Arthur Laffer wrote this article a few years ago that shows pretty conclusively how each component varies based on the marginal rates charged. The article is great for the not-so-economically savvy person. Intuitively, we all know the initial math, but we neglect the economic component, i.e. what do people do in response to change? (Remember my mantra: context is always king). Not only do revenues increase with lower tax rates on the higher levels, but the share of the burden goes up for those in the higher levels of earnings. This has been shown to be the case in each instance of substantial tax reductions from Harding/Coolidge to Kennedy to Reagan to GW Bush.
Those that advocate for the rich to pay their fair share don’t seem to be able to define what that means. When will be enough? Because if we do decide to go after them, it hasn’t followed historically that incoming revenue stream to the government will increase. So is our goal to be fair and tax the rich at a “fair” rate? It seems to me, based on historical data, that if we do that, we’ll be increasing taxes and needing to cut services at the same time. So which do we want? Services funded adequately, or the rich to not have as much? History seems to suggest that our tax rates are somewhere in the “prohibitive range” as shown on image below. If we were on the other side of the “peak” (actually the far-right edge of the curve), revenues would follow rates. Since they do not, again, we appear to be operating on the “prohibitive” side.
We should be on the other side of the peak if we were operating efficiently. Of course, I think it’s important to note, that it’s obvious if you reduce the rates too much, you lose the tax base…the Laffer curve illustrates that. But the point is that once you decide what services you must provide, you have to determine what is the most efficient way to fund it.
The problem I see is that if we decide on a certain amount of spending required, it may actually above the Laffer Peak. See the image above. If that is the case, you will never reach a tax rate that give you the revenue you need. Or better said, if you intend to provide social programs without end in an ever-expanding government, you will never be able to tax to the level you need, no matter what tax rates you decide to impose or how much you want to “soak the rich”. The Laffer curve effectively illustrates the economic, not arithmetic, result of tax code changes. Changing rates in a vacuum does not cause a corresponding increase, as pols from both sides of the aisle sometimes want you believe (such as “coming up with a ‘way to pay’ for a given program with a corresponding tax increase or fee). There is always context, always reaction, always alternatives, always opportunity costs. We all weigh these decisions every day – businesses and “rich folks” will too.
Where I think serious-minded liberals and conservatives must come together is provide some realism in terms of creating a spending ‘ceiling’. I fear we’re past the “tipping point” and that it may only be a matter of time before the weight of the burden collapses on everyone. I think with our spending, we are likely to right of the peak in the image. We are trying to fund all these grand ideas and it is not possible.
Obama’s (and other liberal minded legislators’) tax solution doesn’t make sense. Not because I want the rich to be protected – it bothers me as much as anyone else to see the excesses of the super-rich when the rest of us are grinding away to get by – but because going after them does nothing substantial other than make us think we’re doing justice, while cutting out the rung we’re standing on as we climb the ladder.
Today more evidence that Obama’s plan is to “redistribute” wealth…
By the time we get there, there will be little to actually redistribute.
