— Malcolm X, The Autobiography of Malcolm X
— David Ricardo
— F.A. Hayek
— Ayn Rand, Atlas Shrugged
— John Stossel
There was a time when Democrats and Republicans alike could talk sense about tax rates, in terms of what is best for the economy, without demagoguery about “tax cuts for the rich.”
Democratic presidents Woodrow Wilson and John F. Kennedy spoke plainly about the fact that higher tax rates on individuals and businesses did not automatically translate into higher tax revenues for the government. Beyond some point, high tax rates on those with high incomes simply led to those incomes being invested in tax-free bonds, with the revenue from those bonds being completely lost to the government — and the investments lost to the economy.
As President John F. Kennedy put it, “it is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” This was because investors’ “efforts to avoid tax liabilities” make “certain types of less productive activity more profitable than more valuable undertakings,” and this in turn “inhibits our growth and efficiency.”
Both Democratic president Woodrow Wilson and Republican presidents Calvin Coolidge, Ronald Reagan and George W. Bush said virtually the same thing.
This disconnect between higher tax rates and higher tax revenues is not peculiar to the United States. Iceland and India both collected more tax revenue after tax rates were cut. In Iceland the corporate tax rate was cut from 45 percent to 18 percent between 1991 and 2001 — and the revenue from corporate taxes tripled at the lower rate.
It doesn’t always have to be this way. Everything depends on how high the tax rate is initially and how other things are going in the economy. But at least we can do without the claims that tax cuts are just ways of helping “the rich” or that we have to raise the tax rate because we have a deficit. We need more tax revenue, not higher tax rates that can backfire.
This has not always been either a partisan issue or an ideological issue. John Maynard Keynes said in 1933 that “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”
New York Times economics writer David Leonhardt recently took the “no panacea” approach to rebut the argument for tax cuts. Presidents Bush 41 and Bill Clinton both raised tax rates, and the economy continued to grow, while the economy declined after President Bush 43’s tax rate cuts, Leonhardt argued.
The 800-pound gorilla that gets ignored by people who use these talking points is the dominant economic factor of those years — namely the huge and unsustainable housing boom that led to a catastrophic housing bust that took down the whole economy on Bush 43’s watch.
Tax cuts are not a panacea. In fact, nothing is a panacea or else, by definition, all the problems of the world would already be solved.
Ironically, it was Mr. Leonhardt’s own newspaper that reported in 2006, “An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”
Expectations are of course in the eye of the beholder. Rising tax revenues in the wake of a cut in high tax rates was a possibility expected by five different administrations, both Democratic and Republican, over a period of more than three-quarters of a century.
No one expected automatic and instant surges in economic growth. Both John F. Kennedy and John Maynard Keynes spoke in terms of the long-run effects of lower tax rates, not the kind of instant results suggested by Mr. Leonhardt’s graph of growth rates — least of all during a very volatile housing market in which American homeowners took trillions of dollars in equity out of their homes.
Back during the 1920s, when there was no such monumental economic factor as the housing boom and bust until 1929, there was a rapid increase in both tax revenues and jobs after the tax rates were cut. Today, the uncertainties generated by an activist and anti-business administration probably have more of a chilling effect on investments than the tax rate does.
As readers of this column and viewers of Fox News Channel may know, I have not hesitated to criticize Gov. Mitt Romney’s presidential campaign and the governor himself. I have argued that his message is muddled and his values are unknown beyond his ardent wish to improve economic conditions through the use of free market mechanisms rather than central economic planning, a position with which I agree entirely.
I have also maintained that his willingness to abandon, or not to accept, first principles has made these questions reasonable: If Romney is elected president, which Romney will show up for work on Jan. 20, 2013? Will it be the Romney who ran to the left of Ted Kennedy in 1994, the Romney who governed Massachusetts as Mario Cuomo governed New York, or the Romney who now claims to be a “severe” (his word) conservative? Will it be the Romney who spent the entire presidential primary season assuring conservative Republican primary voters that he’ll dismantle Obamacare on “Day One” (his phrase), or the Romney who told reporters last week that he approves of a limited federal role in managing health care? Or will it be the Romney who, when caught by the press saying something not intended for public consumption but demonstrably true, sticks to his guns?
A few months ago, at a private fundraiser, Romney spoke to supporters and contributors and observed that 47 percent of Americans do not pay any income tax, and thus his call for not raising taxes (though he wants to eliminate some familiar deductions, which is the functional equivalent of raising some folks’ taxes) will not resonate with the voters in that group. Then he went on to say that this is roughly the same 47 percent who are dependent upon the government for part or all of their subsistence; and to that subsistence of food, shelter, education and clothing, the feds have now added health care. Then he referred to those dependent upon the government as “victims” (his word). Then, among my leftish colleagues in the press, all hell broke loose.
The reason hell broke loose among most of the media is that Romney spoke a painful truth, and often a painful truth is difficult to accept. I have argued that FDR deliberately set out to create dependence upon the federal government — and hence upon virtually all Democrats in Congress and Republicans afraid to resist them — by establishing entitlement programs and inducing reliance upon them. FDR went so far as to lie to Americans when he stated that the federal government will “hold” (his word) your Social Security contributions for you until you retire, and then you’ll receive your nest egg of cash. We know he lied about this, because at the same time he was saying that the money deducted from your pay is yours, he dispatched Justice Department lawyers to argue in a constitutional challenge of Social Security before the Supreme Court that the money deducted from your pay is the government’s money, and the government can spend it as it wishes. The Supreme Court agreed with that argument.
Now comes Romney to say that this has gotten out of hand. The feds have deliberately created a class of persons — 47 percent of people living in America today — dependent upon them. The governor is right. Anyone lulled into a false sense of security is a victim, and any government that has deceived members of the public to get them there is dangerous. Thus, the revelation that the big-government types who have dominated the federal government for 100 years, who want voters dependent upon them so that they can count on their votes, and who have made those voters victims have stung the Obama campaign and its media supporters. Romney was correct to call the 47 percent who are dependent upon the government victims of the government’s deceptions and lust for power, and he is courageous to stick to his guns.
Dependency breeds a sense of complacency and entitlement and fosters a government that — in order to stay in power — will further that dependency. Thomas Jefferson and Alexander Hamilton agreed on little publicly, but they did agree that when the public treasury becomes a public trough and the voters recognize that, they will send to the government only those who promise them a bigger piece of the government pie.
Then, sooner or later, the government will run out of other people’s money. Romney understands that.
The recently discovered tape on which Barack Obama said back in 1998 that he believes in redistribution is not really news. He said the same thing to Joe the Plumber four years ago. But the surfacing of this tape may serve a useful purpose if it gets people to thinking about what the consequences of redistribution are.
Those who talk glibly about redistribution often act as if people are just inert objects that can be placed here and there, like pieces on a chess board, to carry out some grand design. But if human beings have their own responses to government policies, then we cannot blithely assume that government policies will have the effect intended.
The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty. The communist nations were a classic example, but by no means the only example.
In theory, confiscating the wealth of the more successful people ought to make the rest of the society more prosperous. But when the Soviet Union confiscated the wealth of successful farmers, food became scarce. As many people died of starvation under Stalin in the 1930s as died in Hitler’s Holocaust in the 1940s.
How can that be? It is not complicated. You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated. Farmers in the Soviet Union cut back on how much time and effort they invested in growing their crops, when they realized that the government was going to take a big part of the harvest. They slaughtered and ate young farm animals that they would normally keep tending and feeding while raising them to maturity.
People in industry are not inert objects either. Moreover, unlike farmers, industrialists are not tied to the land in a particular country.
Russian aviation pioneer Igor Sikorsky could take his expertise to America and produce his planes and helicopters thousands of miles away from his native land. Financiers are even less tied down, especially today, when vast sums of money can be dispatched electronically to any part of the world.
If confiscatory policies can produce counterproductive repercussions in a dictatorship, they are even harder to carry out in a democracy. A dictatorship can suddenly swoop down and grab whatever it wants. But a democracy must first have public discussions and debates. Those who are targeted for confiscation can see the handwriting on the wall, and act accordingly.
Among the most valuable assets in any nation are the knowledge, skills and productive experience that economists call “human capital.” When successful people with much human capital leave the country, either voluntarily or because of hostile governments or hostile mobs whipped up by demagogues exploiting envy, lasting damage can be done to the economy they leave behind.
Fidel Castro’s confiscatory policies drove successful Cubans to flee to Florida, often leaving much of their physical wealth behind. But poverty-stricken refugees rose to prosperity again in Florida, while the wealth they left behind in Cuba did not prevent the people there from being poverty stricken under Castro. The lasting wealth the refugees took with them was their human capital.
We have all heard the old saying that giving a man a fish feeds him only for a day, while teaching him to fish feeds him for a lifetime. Redistributionists give him a fish and leave him dependent on the government for more fish in the future.
If the redistributionists were serious, what they would want to distribute is the ability to fish, or to be productive in other ways. Knowledge is one of the few things that can be distributed to people without reducing the amount held by others.
That would better serve the interests of the poor, but it would not serve the interests of politicians who want to exercise power, and to get the votes of people who are dependent on them.
Barack Obama can endlessly proclaim his slogan of “Forward,” but what he is proposing is going backwards to policies that have failed repeatedly in countries around the world.
Yet, to many people who cannot be bothered to stop and think, redistribution sounds good.
All political candidates call themselves freedom-lovers, but they are not. Neither major party really opposes government control of the economy or of our personal lives. I’m a libertarian because I see the false choice offered by political left and right: Democrats talk about personal liberty; Republicans talk about economic freedom. But what they do once in power belies their words.
I say we’re best off if government just leaves us alone to our peaceful cooperation with whomever we please. Let politicians advocate moral behavior. Let them give to charities. But leave government — which is physical force — out of it.
That’s why I like Gary Johnson, the former Republican governor of New Mexico. He’s the Libertarian Party candidate for president. As governor, Johnson vetoed 750 bills, and yet he got re-elected in that blue state.
I asked Johnson what it means to be a libertarian.
“Fiscally responsible, socially accepting … more liberal than Obama on several issues, more conservative than Romney on several issues.”
Johnson proposes to cut federal spending by more than 43 percent:
“Balance the federal budget now. I think that unless we do that, we’re going to find ourselves in a monetary collapse.”
To do that, he’d go where the money is. He’d cut the big programs that will soon bankrupt us. That includes Medicare. Conventional wisdom says what he’s proposing is cruel and, for a politician, suicidal.
“Look, we’ve got to slash Medicare spending. If we don’t, we’re going to find ourselves with no health care whatsoever. Medicaid, same thing. Military spending, same thing.”
The left claims that without social spending, people would starve in the streets!
“This is the exact reaction that I got as governor of New Mexico, having vetoed all that legislation. … Kids were going to starve, all the worst things were going to happen, and none of them did. And I got re-elected.”
Who would decide what part of Medicare to cut?
“Give this up to the states. Fifty laboratories of innovation and best practice … (instead of) Washington top-down, Washington-knows-best — that’s what has us in the situation that we’re in right now.”
Johnson also says, “End the wars.” Won’t a pullout of our troops mean the terrorists win?
“We have hundreds of millions of enemies … that, but for our military interventions, we would not otherwise have. So let’s take military spending back to 2003 spending levels. Start out with the premise that we should provide ourselves with a strong national defense. But ‘defense’ here is the operative word. Not ‘offense’ and not ‘nation-building.’ We’re building roads, schools, bridges, highways and hospitals in other countries, and we have those needs here in this country.”
In one of Johnson’s campaign ads, he compares the U.S. Constitution to the U.S. tax code.
“One is simple and about equal rights for all. The other is extremely complex and anything but equal rights for all. It’s crony capitalism in a nutshell. It’s the root of evil. Individuals, groups, corporations pay for loopholes. Both parties sell those loopholes. Eliminate the IRS. Abolish income tax (and) corporate tax.”
How will government get money?
“With a national consumption tax. I’m embracing the Fair Tax. … Adopting the Fair Tax would issue pink slips to half of Washington lobbyists.”
Johnson would also legalize marijuana.
“Control it, regulate it, tax it.”
I like Johnson’s message: Let no one be coerced by government beyond the small amount needed to fund a limited government that keeps us safe. Do not let government forcibly take other people’s money. When in doubt, leave it out — or rather, leave it to the market and other voluntary institutions.
But sadly that’s not how most people think. Most people think problems are things that are solved by laws. They assume it’s just the laziness or stupidity of the “other” side’s politicians that prevents government from solving our problems.
But government rarely solves problems. Government is inefficient. There’s almost nothing government can do that we cannot do better as free individuals and groups of individuals working together voluntarily.
Without big government, our possibilities are limitless.
… is from page 75 of Paul Seabright’s excellent 2004 book, The Company of Strangers (original emphasis): More subtly, disdain for money has often been a coded expression of the insecurity of aristocrats and those who lived on inherited wealth in the face of wealth acquired through economic activity and – especially – trade. This insecurity may have had important social and economic consequences, through the way it shaped attitudes toward economic activity in many societies, from ancient Athens to modern Britain. The historian Martin Wiener has argued that the “decline of the industrial spirit” in Britain was due to exactly such unresolved insecurities among such dominant figures in British culture, from the landed aristocracy of the nineteenth century to the literary and artistic influences on so important a figure as John Maynard Keynes.
Former president Bill Clinton told the Democratic National Convention that Barack Obama has a plan to rescue the economy, and only the fact that the Republicans stood in his way has stopped him from getting the economy out of the doldrums.
From all this, and much else that is said in the media and on the campaign trail, you might think that the economy requires government intervention to revive and create jobs. It is Beltway dogma that the government has to “do something.”
History tells a different story. For the first 150 years of this country’s existence, the federal government felt no great need to “do something” when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to “do something” in the wake of the stock market crash of 1929, which set a new precedent.
One of the last of the “do nothing” presidents was Warren G. Harding. In 1921, under President Harding, unemployment hit 11.7 percent — higher than it has been under President Obama. Harding did nothing to get the economy stimulated.
Far from spending more money to try to “jump start” the economy, President Harding actually reduced government spending, as the tax revenues declined during the economic downturn.
This was not a matter of absent-mindedly neglecting the economy. President Harding deliberately rejected the urging of his own Secretary of Commerce, Herbert Hoover, to intervene.
The 11.7 percent unemployment rate in 1921 fell to 6.7 percent in 1922, and then to 2.4 percent in 1923. It is hard to think of any government intervention in the economy that produced such a sharp and swift reduction in unemployment as was produced by just staying out of the way and letting the economy rebound on its own.
Bill Clinton loudly proclaimed to the delegates to the Democratic National Convention that no president could have gotten us out of the recession in just one term.
But history shows that the economy rebounded out of a worse unemployment situation in just two years under Harding, who simply let the market revive on its own, as it had done before, time and time again for more than a century.
Something similar happened under Ronald Reagan. Unemployment peaked at 9.7 percent early in the Reagan administration. Like Harding and earlier presidents, Reagan did nothing, despite outraged outcries in the media.
The economy once again revived on its own. Three years later, unemployment was down to 7.2 percent — and it kept on falling, as the country experienced twenty years of economic growth with low inflation and low unemployment.
The Obama party line is that all the bad things are due to what he inherited from Bush, and the few signs of recovery are due to Obama’s policies beginning to pay off. But, if the economy has been rebounding on its own for more than 150 years, the question is why it has been so slow to recover under the Obama administration.
The endless proliferation of anti-business interventions by government, and the sight of more of the same coming over the horizon from Barack Obama’s appointees in the federal bureaucracies, creates the one thing that has long stifled economic activity in countries around the world — uncertainty about what the rules of the game are, and the unpredictability of how specifically those rules will continue to change in a hostile political environment.
Both history and contemporary data show that countries prosper more when there are stable and dependable rules, under which people can make investments without having to fear unpredictable new government interventions before these investments can pay off.
A great myth has grown up that President Franklin D. Roosevelt saved the American economy with his interventions during the Great Depression of the 1930s. But a 2004 economic study concluded that government interventions had prolonged the Great Depression by several years. Obama is repeating policies that failed under FDR.
Despite demands that Mitt Romney spell out his plan for reviving the economy, we can only hope that Governor Romney plans to stop the government from intervening in the economy and gumming up the works, so that the economy can recover on its own.
At a time when everybody is bent on bringing about a saving in the expense of transport — and when, in order to effect this saving, we are forming roads and canals, improving our steamers, and connecting Paris with all our frontiers by a network of railways — at a time, too, when I believe we are ardently and sincerely seeking a solution of the problem of how to bring the prices of commodities, in the place where they are to be consumed, as nearly as possible to the level of their prices in the place where they were produced — I should think myself remiss to my country, to my age, and to myself if I kept any longer secret the marvelous discovery that I have just made.
The illusions of inventors are proverbial, but I am positively certain that I have discovered an infallible means of bringing products from every part of the world to France, and vice versa, at a considerable reduction of cost.
Infallible, did I say? Its being infallible is only one of the advantages of my invention.
It requires neither plans, estimates, preparatory study, engineers, mechanists, contractors, capital, shareholders, or government aid!
It presents no danger of shipwreck, explosion, fire, or collision!
It may be brought into operation at any time!
Moreover — and this must undoubtedly recommend it to the public — it will not add a penny to the budget, but the reverse. It will not increase the staff of functionaries, but the reverse. It will interfere with no man’s liberty, but the reverse.
It is observation, not chance, that has put me in possession of this discovery, and I will tell you what suggested it.
I had at the time this question to resolve: “Why does an article manufactured at Brussels, for example, cost dearer when it comes to Paris?”
I soon perceived that it proceeds from this: That between Paris and Brussels obstacles of many kinds exist. First of all, there is distance, which entails loss of time, and we must either submit to this ourselves, or pay another to submit to it. Then come rivers, marshes, accidents, bad roads, which are so many difficulties to be surmounted. We succeed in building bridges, in forming roads, and making them smoother by pavements, iron rails, etc. But all this is costly, and the commodity must be made to bear the cost. Then there are robbers who infest the roads, and a body of police must be kept up, etc.
Now, among these obstacles there is one that we have ourselves set up, and at no little cost, too, between Brussels and Paris. There are men who lie in ambuscade along the frontier, armed to the teeth, and whose business it is to throw difficulties in the way of transporting merchandise from one country to the other. They are called customhouse officers, and they act in precisely the same way as ruts and bad roads. They retard; they trammel commerce; they augment the difference we have noted between the price paid by the consumer and the price received by the producer — that very difference, the reduction of which, as far as possible, forms the subject of our problem.
That problem is resolved in three words: reduce your tariff.
You will then have done what is equivalent to constructing the Northern Railway without cost, and will immediately begin to put money in your pocket.
In truth, I often seriously ask myself how anything so whimsical could ever have entered into the human brain as first of all to lay out many millions for the purpose of removing the natural obstacles that lie between France and other countries, and then to lay out many more millions for the purpose of substituting artificial obstacles, which have exactly the same effect; so much so, indeed, that the obstacle created and the obstacle removed neutralize each other, and leave things as they were before, the residue of the operation being a double expense.
A Belgian product is worth at Brussels 20 francs, and the cost of carriage would raise the price at Paris to 30 francs. The same article made in Paris costs 40 francs. And how do we proceed?
In the first place, we impose a duty of 10 francs on the Belgian product, in order to raise its cost price at Paris to 40 francs; and we pay numerous officials to see the duty stringently levied, so that, on the road, the commodity is charged 10 francs for the carriage and 10 francs for the tax.
Having done this, we reason thus: The carriage from Brussels to Paris, which costs 10 francs, is very dear. Let us expend two or three hundred millions (of francs) in railways, and we shall reduce it by one-half. Evidently all that we gain by this is that the Belgian product would sell in Paris for 35 francs, viz: 20 francs, its price at Brussels, 10 francs duty, 5 francs reduced carriage by railway. Total, 35 francs, representing cost price at Paris.
Now, I ask, would we not have attained the same result by lowering the tariff by 5 francs. We should then have 20 francs (the price at Brussels), 5 francs reduced duty, 10 francs carriage by ordinary roads. Total, 35 francs, representing cost price at Paris.
And by this process we should have saved the 200 millions which the railway cost, plus the expense of customhouse surveillance, for this last would be reduced in proportion to the diminished encouragement held out to smuggling.
But it will be said that the duty is necessary to protect Parisian industry. Be it so; but then you destroy the effect of your railway.
Then, I venture to ask, what, under such circumstances, is the good of your railway?For if you persist in desiring that the Belgian product should cost at Paris 40 francs, you must raise your duty to 15 francs, and then you have 20 francs (the price at Brussels), 15 francs protecting duty, 5 francs railway carriage. Total, 40 francs, being the equalized price.
In sober earnestness, let me ask, is it not humiliating that the 19th century should make itself a laughingstock to future ages by such puerilities, practiced with such imperturbable gravity? To be the dupe of other people is not very pleasant, but to employ a vast representative apparatus in order to dupe, and double dupe, ourselves — and that, too, in an affair of arithmetic — should surely humble the pride of this age of enlightenment.