Do Spending Cuts or Taxes Increases Balance the Budget?
If the economists and politicians ever looked at the real world evidence of the United States tax since WWII the answer is as obvious as a $20 bill taped to the end of their nose. Spending overwhelmingly dictates whether we have a balanced budget and a good economy. It is not even close, taxes are a Red Herring that politicians use to divide and conquer with.
First why is not taxing the rich an effective strategy?
Several reasons, inflation, immigration, payroll taxes, but the most important reason is people are not robots. Just because you tax someone does not mean they will pay the tax. Throughout the history of taxes, from 91% to 28%, people pay what THEY think is fair. If it is too excessive people take vacations, get paid in extra benefits, or simply cut back on work. People will always pay what they think is fair and not a penny more.
The Hoover Institute looked at tax collection from 1947 to present with tax rates as high as 91% and the taxes collected as a percentage of the GDP is remarkably consistent 19.5% (actually 17.6%) of the GDP. Simply put the tax debate is a dog and pony show. There is the Hoover graph with a link.
Actual taxes collected as a percentage of the GDP according to the White House:
Here is a video by Cato Institute scholar Dan Mitchell about the Laffer Curve explaining the top tax rate should be 25% or less.
Here is a video about former Obama top economic adviser Christina Roomer’s report on the Laffer Curve and her recommendation that the top tax rate should not exceed 33%.
So how does this work out in real life?
Why is spending so much more important than tax rates?
Let’s pretend we are in the middle ages, in France, and I raise pigs and my neighbor raises chickens.
I love pork but as with anything it gets repetitious and boring after a few days. I want some of my neighbor’s chickens he sells at the local market. If the tax rate on the sale is reasonable, 5%, I am more than glad to pay my money to the king in return for his protecting my farm from bandits and thieves.
But what happens if the transaction tax is 50%, or 100%?
Now the cost of doing business at the local market has become prohibitive. I still want my neighbor’s chickens but simply cannot afford the tax. There are a couple of things I can do:
First, I can try to bribe the local tax collector and have him look the other way when the transaction takes place. the higher the tax the more economic activity becomes “black market” activity. In the USA black market activity accounts for between 8% and 10.1% of the GDP. In Venezuela upwards of 30%.
Second, I can approach my neighbor and offer to barter with him. This is simply a trade of so many chickens for pigs. If I am successful the trade takes place and I get my chickens.
Notice that while the high tax creates economic havoc and corruption, the corruption being desirable for many government regimes, economic activity still occurred and the economy was not severely damaged.
Now pretend the king is at war and he imposes a 50% tax on all farms. If the farmer cannot pay in gold or silver the king will collect the tax by confiscating farm animals.
Can you see the difference?
Now I must pay the king with the very means I have to feed my family, my livestock. When my livestock is reduced 50% this has a profound impact on my ability to make a living. The king is literally depriving me of a means to make a living for myself and my family.
This is exactly what is happening to America since 2000 when the federal government consumed 18.2% of the GDP to today when the federal government consumes 24.3% of the GDP. And there are further expenditures set to kick in with Obamacare. Simply put the King’s greed is out of control. Obama is driving the economy into bankruptcy with his plundering and pillaging of the peasants.
Here is a graph of federal tax collection and spending divided by the GDP from 1947 to 1971 when the USA was still on the Bretton Woods “gold standard” system.
Here is a graph of federal tax collection and spending divided by the GDP from 1971 to today when the US currency is 100% fiat or not backed by gold.
It is apparent that if the politicians are serious about balancing the budget and a good economy spending needs to be cut back to 18% of the GDP. It is that simple.
Monetary authorities need to stop financing the debt by buying bonds from secondary dealers, a end around game of monetizing the federal debt in a underhand deceitful manner.
What has happened is the king no longer respects the peasants and has gotten way too greedy for the good of the country. The peasants need to grab their pitchforks and do a little vigilante justice on the king and his court.