The Invisible Cage

The Invisible Cage
American voters are trapped by four dangerous assumptions about taxation.
by John Hayward
08/08/2011

Lost in the bizarre liberal counter-attack that tries to spin the Standard & Poor’s action as a “Tea Party downgrade,” brought about by the Republicans’ refusal to consider tax increases, is that nowhere does S&P advocate increasing tax rates. They want to see serious deficit reduction, which might involve both spending cuts and increased tax revenue.

In fact, their statement is perfectly agnostic about the methods used to attain deficit reduction: “Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.” [Emphasis mine.]

Increasing revenue does not necessarily require increasing rates. High rates inspire tax avoidance, which the upper income brackets are exceptionally good at. They also depress economic growth. Lower rates can give the government a smaller percentage of a rapidly expanding economy, resulting in much higher receipts to the Treasury. This is especially true when dealing with a walking-dead economy like Obama’s. Cranking up tax rates now would push many tottering enterprises into ruin.

Most of the Republican presidential candidates have called for bold tax reforms. They generally favor either a dramatic reduction, or outright repeal, of corporate taxes. Tim Pawlenty​’s “Better Deal” economic program includes what amounts to a flat tax, with only two rates. Michele Bachmann wants a single-rate tax system, expressed through a tax code no longer than the original Constitution of the United States. Herman Cain​ is an advocate of the “Fair Tax,” which would replace all federal taxes with a national sales tax.

What keeps these simpler, fairer, flatter, pro-growth tax reforms from gaining traction is the invisible cage America has been trapped in for decades. Its bars are forged from four dangerous attitudes and assumptions.

First, and most pernicious, is the concept of static analysis. This is the practice of ignoring the effect of tax rates on economic growth. It assumes that no level of taxation will significantly change the behavior of citizens, so if a top 35% tax rate is raised to 39%, it will result in 4% more revenue. Likewise, if that 35% rate is cut to 30%, the government will “lose” 5% of its revenue.

This is patently absurd, as history has demonstrated repeatedly. It’s one of the reasons Congressional Budget Office projections are always wrong, far outside any reasonable margin of error. If Tim Pawlenty’s proposal to cut corporate taxes from 35% to 15% were subjected to static analysis, it would conclude that 20% of revenue was lost, and the effect would be adding so many billions to the deficit… when, in fact, explosive growth would be more likely to increase net revenue to the Treasury at the lower rate.

Nevertheless, every dramatic tax reform proposal will be subjected to ludicrous forms of static analysis, and declared dead on arrival because it would “increase the deficit” by draining revenue.

The bars of our cage also include the practice of baseline budgeting, which means every surge in spending instantly becomes a permanent part of the government’s ever-increasing budget. Obama’s stimulus boondoggle wasn’t just a one-time misappropriation of funds, for example. It raised the government’s baseline for future spending. Trimming the new, elevated spending level would be denounced as a “savage cut,” even if the government still wound up spending more money.

That’s why the compromise debt-ceiling agreement claims to “cut” a couple trillion in spending… but the government will end up spending $10 trillion more over the next decade. Nothing is actually being “cut” in the sense a normal person would use the term.

The third element of the Invisible Cage is class envy. This will cause any proposal that reduces tax rates on upper income earners to be trashed as “tax cuts for the rich,” who don’t really “need” a tax break. The beneficial effects on the tax rates of lower income earners will not matter to the class-war screamers, or those who take them seriously. Class envy is a set of manacles eagerly donned by the poor and middle class, because they have been assured that a rich person somewhere will be wearing a noose.

Class warfare also colors tax policy at the lower end of the income scale. 47% of Americans currently pay no income tax. Any proposal that would level even the smallest tax upon the free riders will savaged as a cruel attempt to make their difficult lives harder, by “balancing the budget on their backs.” Voters in the no-tax bracket are more likely to respond to these appeals than to ponder the relationship between growth-crushing “progressive” tax rates, high unemployment, and death-spiral deficits.

Increasing the size of this group, to harvest their political energy with class-war rhetoric, was an important task of the Left for many years.

Finally, the Invisible Cage is riveted together with hidden taxes. Corporate taxes are an excellent example. No more cruelly addictive fantasy has ever been peddled to the middle class. Companies do not ”pay” these taxes. They pass them along to the consumer. The cost of everything you buy is inflated by the taxes paid during production and distribution. The sales tax you pony up at the cash register is the coda to a great symphony of confiscation.

This allows new taxes to be imposed upon the populace, by conscripting businessmen as stealth IRS commandoes. It’s a major feature of the Value Added Tax, which the American Left has been quietly nursing in the mushroom garden that fills its intellectual basement for years. The VAT would be a surtax added to every level of industry, concealed from end-user voters by the complex machinery of production. They would be told that a bunch of faceless corporate fatcats would be paying a great new tax to fund vital benefits for the “little guy.”

Only too late would middle-class voters notice the retail price of everything they purchase surging, as the VAT sludge rolled downhill and settled in their wallets. Politicians would cheerfully direct angry consumers to vent their rage upon the heartless capitalists who charged them 40% more for clothing and electronics.

It’s not accurate to say that the Americans who evade income taxes are paying no tax at all. They’re hit by an elaborate constellation of taxes, lurking within virtually every purchase and expense. They don’t understand the system, and they barely feel all the little mosquito bites that collectively drain their life’s blood. They have just enough strength to flip on the TV and learn that government can never get smaller, taxes can never be simplified, and every problem faced by their dying government is the fault of faceless class enemies.

Only in a rare moment, such as the debt ceiling battle, do most Americans perceive the bars of the Invisible Cage surrounding them. It will take great leadership, from those passionately committed to capitalism and freedom, to bend those bars with some truly new ideas.
________________________________________________

To read article by John Hayward, click here.