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Archive for Sunday, April 2, 2006

Tax time spurs some observations

April 2, 2006

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The Beatles started out believing that "love is all you need." But after they'd sold a few records, they discovered that cash is also nice - and they were shocked that someone wanted to take it away from them. They wrote a song about this particular bloodsucker that goes like this: "If you drive a car, I'll tax the street/If you try to sit, I'll tax your seat/If you get too cold, I'll tax the heat/If you take a walk, I'll tax your feet. I'm the tax man, yea, I'm the tax man."

Of course, the tax man does have some fans. "Taxes are what we pay for a civilized society," said Oliver Wendell Holmes. But John Marshall got it right when he said, "The power to tax involves the power to destroy." And in my opinion, Benjamin Franklin's pairing of death and taxes is entirely appropriate. With the approach of April 15, it seems appropriate to air some views on the dismal subject.

The first thing to remember about taxation is that, in the words of U.S. Secretary of Treasury John W. Snow, "You always get less of something you tax,". (Subsidies have the opposite effect: They get you more of something than you need.) Taxes reduce incentives to work and save. They encourage investment in sterile tax shelters rather than in job and wealth creating enterprises. At some level, taxes slow economic growth, which can make them self-defeating. Rising taxes shrink the economic pie, paradoxically lowering government revenues. Remember: You always get less of something you tax.

Taxes almost always have unintended consequences. A tax levied on the sale of yachts, which seemed like an easy way to harvest yachts person's superfluous cash, resulted in declining sales of yachts and had the unintended consequence of putting a lot of shipbuilding wage earners out of work.

Moreover, there's considerable evidence that lower taxes stimulate economic growth. Though diehard tax fans still refer to Ronald Reagan's "disastrous" tax cuts, those cuts preceded what's routinely referred to as the longest peacetime economic boom in our history. George Bush's tax cuts are similarly debunked, even though they appear to have spurred a dramatic economic turnaround.

In 2005, in spite of Hurricane Katrina and high energy prices, the economy grew at 3.5 percent. Nine consecutive quarters of declining business investment have been followed by 10 rising quarters. Over four million new jobs have been created and the unemployment rate stands at 4.7 percent, lower than the average of the 1970s, '80s and '90s. Contrary to dire predictions, government tax revenues have actually increased since the tax cuts.

A recent article in this paper paid tribute to "the rapidly rebounding Kansas Economy, and accompanying increased tax receipts, which have paid for increased spending. And yet, some politicians are still burning to raise taxes.

The idea that America is lightly taxed and regulated is "an illusion," wrote Clive Crook in the Atlantic Monthly. Our government currently absorbs 37 percent of national income, about the same as Australia, Canada, Japan. America's corporate income tax rate is 39.9 percent, the highest among the 30 wealthiest countries. Ireland, which has the lowest corporate income tax rate (12.5 percent) has the fastest pace of economic growth among the European nations.

The highly taxed economies of Germany and France suffer from low growth and high unemployment. The European Union's per capita GDP is 25 percent lower than that of the United States. New York, which has had the highest taxes in the nation for the last 35 years, created jobs at less than half the national pace between 1979 and 2004, according to The Wall Street Journal. Nearly 1.7 million New Yorkers left the state between 1995 and 2004. A Manhattan institute report attributes these negatives to the state's "astonishingly high tax burden."

Champions of government spending bewail the deficit and the mountain of debt we're going to bury our children under. A recent letter to this paper called for the impeachment of George Bush for "taking the largest surplus in history and turning it into the largest deficit." But according to Douglas Holtz-Eakin, former executive of the Congressional Budget Office, the current deficit is running almost exactly at the same the rate it's been every year since the end of World War II. (The government takes in about 18 cents for every dollar of national income, spends 20 cents, and borrows the difference.)

The CBOs predicted 2006 deficit of 2.6 percent of GDP compares to 4-6 percent deficits common in the mid-1980s and early 1990s. "The deficit is projected to return to its downward trajectory in 2007, declining to just 1.4 percent of GDP by 2009," according to Joshua Bolten, former director of the Office of Management and Budget. The real problem we face is future obligations to Social Security, Medicare and Medicaid, which will triple from the current 9 percent of GDP to 28 percent by 2050 if past growth rates continue.

"No plausible amount of tax increases could possibly close the gap that will be created by the unsustainable growth in entitlement programs," wrote Bolten. Unfortunately, our politicians aren't up to facing this reality. They have no interest in reforming our tax code - which contains more than 10,000 sections and costs us $100 billion a year in preparation costs - because it fosters the pork barrel system which they see as the source of their power. The notorious "Bridge to Nowhere" is the kind of project this system promotes.

John Maynard Keynes said that "In the long run we all die," but is this an adequate consolation for the mismanagement of our affairs and the squandering of our future? Scholar Charles Murray has a bright idea that might help save us. "Instead of sending taxes to Washington, straining them through bureaucracies and converting what remains into a muddle of services and subsidies, hedged with restrictions and exceptions, just collect the taxes, divide them up, and send the money back in cash grants to all American adults." According to Murray, we're rich enough to return $10,000 a year to everyone, $3,000 of which would fund a health care account. By 2028, according to his calculations, this plan would cost a trillion dollars a year less than the con game we're playing now.

George Gurley, a resident of rural Baldwin, writes a regular column for the Journal-World.

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