One of the things that drives me crazy is watching the tremendous amount of ignorance the public has about taxes. I have seen politicians, media, private foundations and my own relatives state as absolute fact things I know the be absolutely false. I try to explain in a rational manner what the truth is and it’s useless. People think “logically.” As one who has had years of math classes I and anyone else in that situation quickly gets burned and receives an “F” for thinking “logically.” It is best to pause and think about things a little more thoroughly.
And so it is in public life. We have so many examples of herd mentality. Herd mentality based on emotion. Fannie Mae and Freddie Mac were inspired by the feeling that all people should be given a chance at the American dream. Emotionally it really makes sense. Why not? Yes we can! But hundreds of thousands of defaulted mortgages later we all realize, even the most ardent supporter of Fannie and Freddie, that maybe more thought should have went into regulation and oversight.
And so it is with taxes. We now owe 10 trillion in debt. Hell, even I don’t know what that is. $40,000 per man, woman and child? Somewhere around there. And if you look at the direction of the bail outs and congress this total will soon reach $18 trillion. We got to $10 trillion with Republicans. Nancy Pelosi gives every indication that is nowhere near enough.
So if we all acknowledge the problem and want to pay the money back what is the best way to do it? The emotional knee jerk reaction is to raise taxes. Seems logical. Raise taxes and more money will come into the federal treasury. Right? Wrong.
Since classical economic theory back in the early part of the 20th century economist have always known about money circulation. What is referred to as velocity. The faster money goes through the economy the more money people make and the more taxes are collected. Since then the equations have gotten a lot more complex with partial differentials, regression analysis and other mathematics. The principals are the same. The faster the economic activity the more jobs, income and taxes.
So how do we get a faster economy? There has to be some tax rate that allows maximum tax collections right? Yes there is. Arthur Laffer took a simple business principal studied by millions of business
majors the world over. The maximum profit point or maximum revenue point. It the point where the price of your Chevy trucks makes you the most profit. Charge too much and you lose customers. Charge to little and you lose money. It’s not that complex. Disney does it for ticket prices. Walmart does it for their store pricing policies. All business does it. So why when Arthur Laffer does this same thing for government maximum revenues is he ridiculed for “trickle down,” “Voodoo” and other names too discredit his theory?
Because he discovered that the maximum revenue point for tax collections for a economy was about 27% to 30%. That would be federal, state and local taxes combined. He looked at all taxes because that is what we all pay. State income tax, sales, property, sewer, telephone, federal, social security, Medicaid, Medicare, gas, cable, the whole picture. And the picture wasn’t pretty. Currently we pay around 44% of our earnings in taxes. Now it’s easy to see why politicians react stridently against Laffer and his “trickle down” or supply side economics. We are taxed too much and it hurts our economy. It would be a similar reaction if a medical doctor walked into the village hospital and told the witch doctor his method of using leeches to bleed patients was causing infection and anemia. The witch doctor would not be very pleased to hear this news. Politicians don’t want to hear that taxes are too high. And so we get the disinformation and smears.
What is the best tax system? As a Libertarian I support the fair tax for several reasons. First a simple explanation of what the fair tax is. Skip ahead if you are familiar with it. The Fair Tax would eliminate all federal taxes. No payroll, social security, Medicaid, Medicare or corporate taxes. They would all be replaces with a 23% retail sales tax. No IRS, no April 15th, no corporate taxes. This alone would save billions in accounting and compliance cost. Billions that could be spend on more productive uses.
First a sales tax would shift taxes from income to spending. A very critical point for a nation 10 trillion in debt. If people saved they would pay no tax. If they spent they would be taxed. Guess which direction people would go? Savings and investment are more critical now than ever before. Soon our debt will exceed what we owed during the darkest days of WWII as a percentage of our Gross Domestic Product (GDP). Without dramatically increased domestic savings and investment we will be subject to the whims of foreign power that may or may not be friendly to our interest. What would happen if we get in an international dispute with China? China could tank our economy overnight that’s what would happen. Taxing spending instead of income is a no-brainer for the situation we are in today.
Second a sales tax would eliminate the IRS. Why pray tell does the government need to know what every worker makes? What business is it of theirs? Are we free men? Not in today’s society. Think about it. The government can investigate you for political beliefs or whatever they choose to and all they have to do is make a phone call to the IRS and they know what you are doing 2,080 hours of your life a year. Probe a little further and voilà, tax filing mistakes! Getting rid of the IRS would be the biggest transfer of power from the government to the people since the Declaration of Independence. Politicians cringe at the prospect of this.
Third no corporate taxes. Currently the corporate tax rate is 35%. Now think about it. Who pays that tax? If you ran a business and had to charge 35% for the government what would you do? Raise prices as much as possible. Lay off workers or buy less equipment. Pay fewer dividends or do less research and development. All pretty damaging to your company and to the overall economy. To put it simply corporate taxes are nothing more than additional taxes on you. You pay with lower wages because there is less demand for workers. You pay higher prices for products. You pay by receiving less dividend income for your savings and retirement. Another no-brainer. Get rid of all corporate taxes.
A couple of interesting observations about corporate taxes. First some big corporations like complex corporate tax systems and draconian accounting rules. Why? It keeps competitors occupied and discourages start up companies. The Sarbanes-Oxley Act of 2002 should be called the No New Competitors ACT because no new company can afford all the compliance hassles of the Act. And when the complex accounting rules are in place where to the big corporations go to get relief? Why congress of course. Congress uses high tax rates and a complex accounting system as a way of getting donations from companies and industries looking for tax breaks and relief. The typical thought process of a bright financially orientated federal legislator is to raise taxes as high as possible and sell the tax breaks to the highest bidder. What is best for the people or new companies never enters their head.
The second observation I would like to point out is if there were no corporate taxes what would happen to all the lobbyist on K Street? 90% of them would pack up and go home. The only remaining lobbyist in Washington would be the ones trying to win government contracts. Anyone want restrictions on lobbyist? Why not get rid of them. Seems like the best solution. Adios Senor Corruption.
For more information please go to fairtax.org.
The second type of tax is the flat income tax. Just like the one Ronald Reagan had in 1986. It was great. It was great for about 2 weeks until the lobbyist started getting tax breaks and rewriting the tax code to its current 66,000 page bible-times-four thing. Does anyone understand it? Flat tax systems work when you keep the tax flat which will never happen in the United States. Russia has a 13% flat tax system. Good luck Russia keeping it that way. We wish you all the best. Something tells me in 10 years it may not be so flat anymore.
And finally we have our whatever you call it tax everything policies. All the levels of government
have taxes for everything. Very inefficient and very damaging to the economy. Anyone run a corporation lately? State taxes, workers compensation, federal taxes, forms, paperwork, accountants, and lawyers. Oh what fun and joy! Not. Makes me want to kick the dog and commit various other acts of violence. Get rid of the layers and layers of useless time consuming work and let business sell whatever it wants to sell. Wow! The economy would be on steroids. Unemployment would be 3% to 4%. The recession would end almost overnight.
In a perfect world all states would have a sales tax like we enjoy in Florida. This is very critical for Florida because we have such a huge “mail box” and billionaire economy. Essentially retires move her and earn low incomes mostly through pensions and social security. Yet a lot of these retires have amassed
substantial wealth through the years. A state income tax would fail to tax most of this wealth. But when Mrs. Retiree goes down to buy her new Lincoln she has to pay sales tax like everyone else. When Mr. Billionaire buys his new yacht he pays the sales tax. This is a tremendous benefit to Florida and has attracted workers to this state ever since I can remember. Generally but not always we have a lower unemployment rate than the rest of the country. Currently the loss of construction jobs has put Florida about even with the rest of the nation.
So when the politicians tell you we need to raise taxes they are either ignorant, stupid or devious jerks who have no compassion for their fellow men and women. Most likely the latter. Most of the idiots get the fisheries and FEMA committee assignments. The game plan is simple for these maniacal power hungry predators. Enslave the people with debt and taxes. Pass out tax breaks to the highest bidder. Get that account in the Grand Caymans. Live well and keep the peasants fighting for the scraps.
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- Arthur Laffer
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- Arther Laffer
December 22nd, 2008 at 10:31 pm
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