Progressive Taxes Are Hurting The Economy

It appears the Left has yet to learn the lesson about 'progressive' taxes and their effect on the economy. Only in their minds does stripping away increasing amounts of money from those who earn it magically help the economy to recover. There's plenty of historical evidence that contradicts their beliefs but that hasn't stopped them from wanting to keep raising taxes in anticipation that revenues will increase, ignoring the fact that people will modify their plans in order to reduce their tax liabilities.

So as the Senate and House take up competing budgets this week, President Obama and his congressional allies have renewed their demands for more revenue. The claim is that taxes remain far below historical norms, despite the recent rise in tax rates.

Well, yes, federal revenues have averaged only 15.3% of GDP over the past four years, the lowest share in 60 years. But that did not happen because tax rates are too low. Federal revenues are down because economic growth is too slow.

So what's the Left's answer? Raise taxes even higher. But that will not generate the revenues they expect because yet another increase in taxes will slow economic growth even more as money that would have been used by taxpayers to buy goods or services or to invest will be taken from them to be spent on activities that do nothing to bolster the economy. One of those activities: paying the interest on monies already borrowed (and spent). That does little to stimulate the economy.

Another downside to raising taxes? Even more dependence of high income taxpayers, a formula for disaster.

By consistently pushing for higher tax rates on top earners, and tax credits and lower rates for lower- and middle-income earners, Democratic tax policies have unintentionally left the government dependent on the prosperity of upper-income taxpayers. Since the current recovery is so dismal, revenues have tanked.

We've seen this on a smaller scale in California, whose tax burden has fallen upon high income earners at a time when many of them aren't making as much money as the were before or have found ways to defer their income, in turn decreasing their tax burden and the revenues collected by the state. This has left California with yet another problem with revenue shortfalls even as they boost taxes across the board. This places a bigger burden on those who don't have the means to defer or shelter their income, meaning mainly the middle class. The poorer citizens of California will also see their tax burdens increase, taking a disproportionate toll on their discretionary income. I doubt this was the intent of the “Let's tax the hell out of the rich” Left. Call it yet another example of the Law of Unintended Consequences.

Somewhat off topic, I am becoming more convinced it's time to take away the ability to tax income at the federal level. It's too easy to insert exemptions and tax breaks for favored industries, groups of individuals, or causes. This means the rest of us have to make up the difference. It also makes the tax code a morass of contradictory, arcane, or totally indecipherable tax regulations. When even the IRS doesn't understand the tax code, how can the rest of us have any hope of doing so?

It's time to do away with the federal income tax and change over to a consumption tax – a sales tax – that everyone pays. There should be certain items that should not be taxed, like food, clothing, shoes, and other staples. This would ensure the poor aren't unnecessarily burdened by such a tax, an argument always put forward by the same “Let's tax the hell out of the rich” Left. This would eliminate most of the tax paperwork we have to deal with every year. It also automatically scales, meaning the more you buy, the more you pay. A national consumption tax would also spur savings, because unlike today, interest earned on savings wouldn't be taxed. Neither would capital gains.

All I know for sure is that our tax code is seriously broken, our federal government is spending money it doesn't have (and never will), and they will soon run into the Thatcher Limit (Socialism works until you run out of other people's money).