The Tax Bite Cometh

Monday, 26 Apr 2010 04:22 PM

By Christopher Ruddy

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What’s the big difference between “us and them”?

It’s a simple, philosophical one.

We who believe in free markets think the economic “pie” is not fixed. It can actually grow.

In fact, we know that an increase in one person’s slice of the pie doesn’t mean, necessarily, another person’s portion of the pie is diminished.

Those whose politics lean socialist see the pie as absolutely fixed. Wealth needs to be redistributed from those with the most pie to those with the least.

As President Barack Obama told Joe the Plumber during the 2008 campaign, “I think when you spread the wealth around, it's good for everybody."

This populist concept sounds nice, but it usually has the opposite effect. Redistribution of income often means that the pie actually shrinks.

Here’s why: socialism penalizes those who are the top economic performers, the financially well off, with higher taxes. Tax something, as Jack Kemp said, and you’ll get less of it. Tax economic success, and you’ll simply reduce the overall economy’s growth.

I am amazed by the number of pundits on television constantly suggesting that economic “growth” is not the answer, that additional taxes are the only way to fix our problems.

This view has great credibility in Congress and the media world despite the empirical evidence that everywhere socialism and high tax, redistributive policies have been tried, they have always failed and always led to lower economic growth.

Scarily, the Obama administration continues to take this statist approach, actually growing government expenditures while increasing taxes, especially on the rich, during this economic crisis.

Last year the Obama deficit widened to a staggering $1.4 trillion. The Congressional Budget Office estimates that the entire national federal debt (which I might add, does not include state and local debt) will hit $20 trillion in the next decade.

The nonpartisan Tax Policy Center estimates the United States will have one-half-trillion-dollar annual deficits for the next several years. (This sounds like a conservative figure to me.)

And Obama and Democrats in Congress appear dead set on increasing taxes, especially on the “rich,” to close this gap, rather than slashing spending or taking a growth approach, such as cutting taxes.

But the potential harm of tax increases has been demonstrated by the Tax Policy Center, which found that the federal government would have to dramatically raise taxes on the wealthiest to close the one-half-trillion-dollar deficit.

The Center reported that, to close the $500 billion gap, the two top tax brackets would have to increase dramatically, from 33 percent and 35 percent today, to an amazing 72 percent and 77 percent.

Increasing top tax rates on the wealthy is reminiscent of the 1930s, when New Deal policies raised the top rate to 90 percent.

The effect of such oppressive taxes on the highest earners was disastrous then, helping to keep the country in a depression for more than a decade.

Obama and the Democrats in Congress won’t be so bold to raise tax rates so high. Instead, they will allow for an incremental approach, increasing taxes through several means.

For example, the Bush tax cuts automatically expire this year, yielding an immediate 10 percent tax increase on the highest brackets without Congress or the president lifting a finger.

Already, Speaker Nancy Pelosi and Obama economic adviser Paul Volcker are talking about a European-style value added tax, tantamount to a national sales tax. Obama gave the whole idea legitimacy in late April during an interview with CNBC.

Asked about a VAT, Obama indicated he was awaiting a report from a bipartisan committee examining the country’s fiscal woes.

"I know that there's been a lot of talk around town lately about the value-added tax,” Obama said. “That is something that has worked for some countries. It's something that would be novel for the United States."

"And before, you know, I start saying 'this makes sense or that makes sense,' I want to get a better picture of what our options are," Obama said.

Clearly he hasn’t closed the door, and Pelosi and Volcker’s enthusiasm for a VAT should not be ignored.

Reason magazine editor Matt Welch, writing in the New York Post, described that VAT as a deeply intrusive tax.

He writes: “VAT, first rolled out in 1950s France, is a sales tax on everything that every person or entity buys within a country, with exceptions or reductions carved out for things like food, newspapers, or various links along the industrial supply chain.

“Compared to the H&R Block subsidy program that is the US tax code, the VAT is a straightforward way for governments to skim 20 percent or so off the top of every transaction.”

Why in the world would the Democrats be pushing a national sales tax that penalizes consumption in a country where 70 percent of the total economy is driven by consumer spending?

It’s madness.

But there is another, evil agenda at work. It’s about high-taxed states angry with states that have low taxes.

Many blue states have onerous income taxes on their residents, as much as 10 percent or more, on top of already high federal taxes. Such states, like New York and California, have bloated welfare systems and bureaucracies.

Believing the “pie is fixed” approach, these blue states continually tax their highest-income citizens to pay for the high costs of their ever-growing welfare, education, health, and other programs.

Unfortunately for these blue states, taxpayers often can vote with their feet. They simply move to low tax states such as Florida, Nevada, and Texas, which have no state income tax.

This exodus of wealthy taxpayers is infuriating the Washington “blue state” establishment, who want additional taxes on the wealthy so that they can funnel these new revenues through Washington back to their big-spending states.

Despite the fact that higher taxes in blue states clearly lead to a shrinking economy, those who embrace this redistributionist philosophy simply don’t care. We see the same apathy in Washington today.


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