Dan­ger­ous delu­sions

The Washington Times Weekly - - Commentary -

Have you ever won­dered why so many peo­ple see higher taxes and more gov­ern­ment as the so­lu­tion to ev­ery prob­lem, de­spite the em­pir­i­cal ev­i­dence that more gov­ern­ment re­duces eco­nomic ef­fi­ciency and growth and di­min­ishes our lib­er­ties?

As will be shown, the ar­gu­ments from the big gov­ern­ment ad­vo­cates are usu­ally based on a com­bi­na­tion of eco­nomic and his­tor­i­cal ig­no­rance, in­clud­ing an in­abil­ity to think be­yond Stage 1, envy, and just plain delu­sional think­ing. The New York Times edi­to­rial page has long been a bas­tion of this delu­sional think­ing. On April 24, the pa­per pro­duced one of its clas­sic inane edi­to­ri­als in fa­vor of higher taxes on la­bor and cap­i­tal, which con­tained this gem of a sen­tence: “Memo to McCain: 401(k) savers get no ben­e­fit from a low cap­i­tal-gains [tax] rate.”

Ev­ery­one who has ever taken ba­sic eco­nomics should know a lower tax rate on an in­vest­ment (i.e., the cap­i­tal-gains tax) will lead a higher rate of re­turn, and hence the in­vest­ment will be worth more. Other things be­ing equal, lower cap­i­tal gains tax rates will lead to higher stock prices, and all who hold stocks will ben­e­fit, whether or not they pay a par­tic­u­lar tax on that stock. Though this con­cept is not dif­fi­cult for most peo­ple to un­der­stand, it seems be­yond the knowl­edge and rea­son­ing abil­ity of those who write edi­to­ri­als for the New York Times.

Un­for­tu­nately, the Times has plenty of global com­pany when it comes to eco­nomic ig­no­rance, envy and delu­sional think­ing. We find it among many politi­cians in al­most ev­ery gov­ern­ment. In­ter­na­tional or­ga­ni­za­tions, such as the United Na­tions, and even the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment and their de­pen­dent al­lies, are filled with those who ad­vo­cate higher taxes on cap­i­tal and la­bor, all in the name of “tax har­mo­niza­tion.”

The fol­low­ing are only some ex­am­ples of what those who ad­vo­cate higher taxes on cap­i­tal and la­bor ei­ther do not un­der­stand or will­fully choose to ig­nore:

• Many stud­ies by lead­ing economists, in­clud­ing those from even the In­ter­na­tional Mone­tary Fund and World Bank, have shown most coun­tries tax and spend at a level higher than that which would max­i­mize their eco­nomic growth and so­cial wel­fare.

• Fi­nan­cial cap­i­tal (pro­duc­tive sav­ings and in­vest­ment) is the “seed corn” of mod­ern economies, and when it is taxed there are fewer funds avail­able for busi­ness­peo­ple to cre­ate new jobs and in­vest in new pro­duc­tiv­ity, in­clud­ing life en­hanc­ing and life­sav­ing in­no­va­tions.

• When la­bor is taxed at high rates, it dis­cour­ages peo­ple from work­ing (at least in the le­gal econ­omy) and in­creases the cost of hir­ing by em­ploy­ers, which re­duces their de­mand for work­ers.

• Most gov­ern­ment pro­grams do not live up to their billing in that they cost far more than pro­jected and pro­duce less than promised. Re­cent U.S. gov­ern­ment stud­ies have shown that about 50 per­cent of all tax­payer dol­lars do not achieve the promised re­sults. There is lit­tle rea­son to be­lieve most other gov­ern­ments per­form any bet­ter. There is no ev­i­dence that gov­ern­ments spend­ing more money use it any more ef­fi­ciently than those spend­ing less, and the con­trary is more of­ten the case.

• There are few ex­am­ples of gov­ern­ments bal­anc­ing their bud­gets or im­prov­ing their fis­cal sit­u­a­tions by in­creas­ing tax rates, but there are many ex­am­ples of gov­ern­ments bal­anc­ing their bud­gets through spend­ing re­straints and, at times, re­duc­ing tax rates. The fed­eral sur­pluses dur­ing the last Clin­ton ad­min­is­tra­tion in the late 1990s only oc­curred af­ter the newly elected Repub­li­can Congress im­posed strict spend­ing lim­i­ta­tions and the cap­i­tal gains tax rate was cut by Congress and signed into law by Pres­i­dent Clin­ton.

• Most peo­ple can make bet­ter de­ci­sions about how to spend their money to aid their fam­i­lies than can politi­cians and gov­ern­ment bu­reau­crats. When taxes rise, peo­ple’s abil­ity to take care of them­selves is re­duced and they more be­come de­pen­dent on gov­ern­ment.

• Higher tax rates re­duce in­di­vid­ual lib­erty by deny­ing peo­ple the fruits of their own la­bor.

• Some of those who claim tax rates must be in­creased use the ar­gu­ment that the cost of gov­ern­ment pen­sion (So­cial Se­cu­rity) and med­i­cal aid pro­grams are grow­ing faster than the econ­omy. Yet th­ese same peo­ple ig­nore (or ar­ro­gantly dis­miss) many of the cost-sav­ing and pri­va­ti­za­tion pro­pos­als from rep­utable pub­lic pol­icy or­ga­ni­za­tions and schol­ars, which would not only to lower costs but im­prove re­sults. The fact is, un­less the rate of cost in­creases is brought down, no tax rate in­crease can pos­si­bly solve the prob­lem.

• Fi­nally, there are some tax in­crease ad­vo­cates who still have the long dis­cred­ited so­cial­ist men­tal­ity that even when a tax in­crease hurts ev­ery­one, it is jus­ti­fied in the name of “fair­ness.” When Sen. Barack Obama was in­formed that his pro­posal to nearly dou­ble the cap­i­tal­gains tax rate would most likely re­sult in less rev­enue for gov­ern­ment, he said it was still jus­ti­fied in the name of “fair­ness.”

The log­i­cal con­se­quence of this no­tion of “fair­ness” would be a much lower stan­dard of liv­ing for ev­ery­one, which I doubt is what the good sen­a­tor de­sires. De­spite their delu­sional rhetoric, I even doubt the edi­tors of the New York Times re­ally want to see their own in­comes fall to that of the av­er­age per­son, let alone to the level that would re­sult from their eco­nomic pol­icy pro­pos­als.

Richard W. Rahn is a se­nior fel­low at the Cato In­sti­tute and chair­man of the In­sti­tute for Global Eco­nomic Growth.

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