Wednesday, November 14, 2007

Smackin' the bottomless pinata

Jonah Goldberg argues that the increasingly unbalanced tax system creates a disconnect between taxes and government accountability that discombobulates our democracy and sets on the path of the "oil states":

Let's take seriously for a moment the notion that rich people are an inexhaustible army of Energizer bunnies that just keep going and going, no matter what taxes you throw in their path. You can see where Democrats get this idea, after all. The top 1 percent of wage earners already provide nearly 40 percent of federal income tax revenues. The bottom 50 percent of taxpayers contribute only about 3 percent.

Taxes are a necessary evil. But their silver lining is that they foster a sense of accountability and reciprocity between the taxpayer and the tax collector. Indeed, democracy is usually born from this relationship. Widening prosperity brings a rising middle class, which in turn demands the rule of law, incorrupt bureaucracies, and political representation in exchange for its hard-earned money. You might recall the phrase "no taxation without representation."

The one great exception is what development experts call the "oil curse." In countries "blessed" with oil wealth or similar resources, the relationship between the government and the governed gets distorted. These "trust-fund states" (author Fareed Zakaria's term) don't need taxes, so their rulers worry little about representation and accountability, opting instead for paternalism or authoritarianism. Worse, the people are less inclined to see government as their expensive servant and more as their goody-dispensing master.

Today, our politics seem to be suffering from a "rich people curse." We treat the rich like a constantly regenerating pinata, as if they will never change their behavior no matter how many times they get whacked by taxes. And we think everyone can live well off the treats that will fall to the ground forever.
Barack Obama's (and probably Hillary Clinton's) answer to the Social Security shortfall is to raise the cap on taxable income and impose the largest marginal tax rate in history. Every new program proposed by every Democrat will be paid for by "rolling back the Bush tax cuts" and making the rich pay their "fair share" which is, I guess, an even larger proportion of the total tax revenues. The result is a society where fewer people pay the taxes and a much larger section of people vote for those people to pay the taxes. And why not?

I've made this same argument about ever-increasing cigarette taxes. What would happen if, suddenly, all those smokers went cold turkey? The state and federal governments would collapse. Now what if all the high-income earners decide "enough is enough" and it's not worth it to make that extra dollar just to have it snatched away? Ayn Rand may have been a shrill polemicist, but there's a kernel of truth to her story of a dystopia entirely dependent on the productive few.

6 comments:

Anonymous said...

[i]What would happen if, suddenly, all those smokers went cold turkey? The state and federal governments would collapse. Now what if all the high-income earners decide "enough is enough" and it's not worth it to make that extra dollar just to have it snatched away?[/i]

Heavens to Betsy! What if? What if the upper class decided (at the secret upper class convention, naturally: attendance mandatory) to punish society by immediately ceasing production, and living off the meager pittance of savings the taxman hasn't yet grabbed?

Wouldn't that be just awful? Oh God... what if?

And what if all U.S. currency came to life tomorrow, and started biting people who tried to spend it? It would sink our economy!

There are good arguments for and against "richer citizens should pay more." But impossible hypotheticals like "what if the upper class quits?" or fictional rhetoric in the mouths of Ayn Rand's cipher characters aren't those arguments.

Eric said...

Have you ever seen the cover of "Fortune" or "Forbes" or "Smart Money" magazine? Every single month there's a story about "retiring early." For the kind of people who read those magazines (I don't) you're talking about an unaccounted tax windfall gone into retirement.

Yeah, they're not quitting en masse but the principle is that the effort to make that marginal dollar is not worth it; it's not earned and it's not taxed. When the government depends so heavily on "the rich" for tax revenue, it's not going to hurt the doctor or the lawyer; it's going to hurt everybody else.

Anonymous said...

Sorry, but that smacks of the "we must give Texaco huge tax breaks on top of their profits, or else they'll become so discouraged and unmotivated that they won't ever wanna look for oil again" crapola that's defined this country's policy for the past 75+ years.

Perhaps you could direct us to some confirmed sightings? Some actual examples of this allegedly instinctive reaction: "ah, phooey, let that marginal dollar lay where it is"?

Anonymous said...

http://www.thecarpetbaggerreport.com/archives/6602.html

“The president’s tax policies have strengthened the economy, as we knew they would,” Cheney told the [Conservative Political Action] conference, according to a text posted on the White House’s Web site. “And despite forecasts to the contrary, the tax cuts have translated into higher federal revenues.”

...“It’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” Cheney said, explaining why Bush has proposed the new Treasury Department division. “The evidence is in, it’s time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.”

To hear the vice president repeat such nonsense is disconcerting. The theory, in a nutshell, is that tax cuts can’t lead to deficits because they pay for themselves — tax cuts grow the economy, which leads to wealthier people, which leads to more tax receipts. Under this approach, we can cut taxes all we want and it won’t affect the deficit at all. (Bush publicly embraced a similar approach in April 2003.)

No wonder these guys have added a few trillion dollars to the debt over five years; they have no idea what they’re talking about.

First, Bush’s huge tax cuts are responsible for the largest budget deficits in American history. If Cheney were right, federal spending would be exclusively responsible for the annual budget shortfalls. This is demonstrably false.

Second, even the White House’s own budget projections don’t expect Bush’s tax cuts to pay for themselves through stronger growth. As the Center on Budget and Policy Priorities explained, “To the contrary, the budget projects that under the President’s policies, federal revenues will grow at a slower annual rate between 2001 and 2008 than in any comparable period over the last five decades…. In addition, the budget projects that under Bush policies, the budget will be in deficit every year for the next 50 years.”

And third, economist N. Gregory Mankiw, Bush’s hand-picked chairman of the White House Council of Economic Advisors, has for years argued against the idea that tax cuts can pay for themselves.

In Mankiw’s textbook, “Principles of Economics,” the economist said when the Reagan administration tried this approach in the 1980s, it was an example of “fad economics” and came after the administration relied on the advice of “charlatans and cranks.”

Eric said...

First "Anon" - I don't have testimonials, but you have to believe there's a "personal Laffer curve" for people when their last dollar is taxed at 100%. Maybe one example is the drop in OB/GYN doctors. Although it's one of the highest-paid specialties, many doctors will not do it because of the extremely high cost of liability insurance. Better to earn less (whoops, fewer tax revenues). But this is ancillary to the main point that the country is now overly-dependent on a shrinking number of taxpayers. If the marginal rate goes up again (with taxes rates or raised caps), the bankers in the Cayman Islands will be busy indeed.

Second anon: Usually when you write "this is demonstrably false" it's a good practice to, you know, demonstrate it.

Fact: tax receipts have headed steadily up since the 2003 tax cuts (http://taxprof.typepad.com/taxprof_blog/2005/12/growth_in_feder.html)

Fact: the deficit is now significantly lower because of record federal revenues (numerous news sources)

The rise in federal debt (which is now a lower % of GNP because of a steadily growing economy) is due to the war in Iraq and overspending.

Quoting from the Carpetbagger Report? C'mon.

Anonymous said...

I don't have testimonials, but you have to believe there's a "personal Laffer curve" for people when their last dollar is taxed at 100%.

So the rich should get a break because of something that has never happened in American history, and which will never happen?

To protect that dreaded "last dollar," we must let all those middle dollars roam free? (There's nothing more breathtaking than the sight of a herd of capital gains, as they gallop majestically across the open plains.)

Decades ago, the top tax rate was 77%-79%, and effectively as high as 91%. Even under those onerous conditions, we didn't see the imaginary scenario you weave of disgruntled spite retirements and tycoons jus' goin' fishin'. It didn't happen. It's completely implausible.