Thursday, December 21, 2006

Tax cut myths and Marxist posturing

Socialist engineers cannot abide private capital.

by StFerdIII

If you want to ‘out’ a closet Marxist just pose what should be a trivial question – ‘do you support tax cuts?’ The horrified cultural Marxist warrior and self-appointed and anointed socialist engineer, will convulse into terror replete with electrified hair and spit out frenzied angry responses pointing out that tax cuts kill people; enslave blacks; starve babies; force the old to eat dog food; discriminate against the poor; are unrepresentative of ‘civilized values’; cause budget deficits and are ‘sops to the rich’ and Halliburton. So distraught will the bulging eyed elitist cultural Marxist become, that he will not be able to finish drinking his kool-aid and enjoy his sensible trans-fat free muffin. With the cultural Marxist warriors, rational discourse is not easily achieved.

According to cultural Marxists and social engineers, tax cuts are ideologically driven attempts to destroy the social welfare state and increase the incomes of the rich while ensuring that the poor and old are dispossessed. Nothing is easier for politicians posing as populists to push, then a program of ‘hate the rich’. Sadly for the Marxists tax cuts do not eradicate civil society, nor do they create a poorer society, nor do they cause budget deficits. In fact tax cuts do the opposite. Historical case studies confirm this.

Countries that have lower tax regimes are wealthier, have higher standards of living and less people living in poverty. A simple example is socialism’s poster girl – Sweden. Fully 40% of Swedes live below the US poverty line level – all transfers and cash grants included [see the Timbro Institute]. In the US only 8 % of the population lives on $19.200 or less for a family of four versus 30% of Swedes. In the US 50% of the ‘poor’ own their own home and 75 % live in more square footage than the ‘average’ middle class Swedish family. Almost 80% of US poor own their own assets far outstripping the Swedish ‘poor’. Socialism and high taxes only means a more general poverty for all.

Lots of evidence exists for a rising economic tide, driven by tax cuts, lifting all boats – including those of the poorer members of society.

In 1986 after raising taxes for 4 straight years Reagan finally saw the light. Reagan implemented a sweeping range of tax reforms and marginal tax rate reductions that spurred economic growth for more than 10 years. These Reagan tax cuts, as with similar measures enacted in the 1920s and 1960s [under JFK], demonstrated that reducing excessive tax rates stimulates growth, reduces tax avoidance, and increases the total amount of tax money paid by the rich. Despite a recession individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989 whilst the top 1 % increased their share from 20% to over 30% of total tax revenues. [see Christopher Frenze Chief Economist to the Vice-Chairman, Joint Economic Committee 1996]

Even that doe-eyed populist Clinton saw Reagan’s light. In 1997 Clinton cut the capital gains tax rate from 28% to 20%. This meant that the after-tax return from a $100 capital gain increased from $72 to $80—an 11% increase. While not huge this 11% increase in incentives led to the late 1990s boom in home investments, stock prices, venture capital investment and innovation. GDP growth accelerated and unemployment fell. Government revenues ramped upwards more than 10% per annum creating surpluses as spending was held reasonably in check.

Following in his predecessors footsteps Bush in 2003, stimulated the US economy by reducing dividend and capital gains taxation equal to about 8 % of US national income [vs. 6 % under the Reagan tax cuts and 10% under JFK’s cuts]. Bush’s tax reform reduced the cost of capital, encouraged more investment and savings, and increased paid-out dividends. The end result has been a robust economy; a record low rate of unemployment; rising stock prices and a rebound in venture capital investment.

All of these factors have propelled US net assets to their highest level in history - $55 Trillion – and all income groups barring the lowest 5 % have seen both net incomes and net assets rise. For lower income workers wages have not kept pace with the general increase across income categories mainly due to illegal and legal immigration competition for lower-end, unskilled jobs.

For the socialists note this – thanks to the Bush tax cuts US government revenues are up 15 % per annum. Faster economic growth rates stimulate more revenues and profits; and lower rates allow people to claim income instead of hiding profits. Tax cuts actually result in more government revenue. If governments are smart enough to pay off debt and reduce non-essential spending is however, an entirely different matter. Bush for instance has increased spending by 15 % each year on average since 2001, leading to a reasonably small US budget deficit as measured as against available market capital.

Why do tax cuts work? They work because they increase the incentives for new investment, not by stimulating demand. The message is clear – to solve poverty, produce wealth for social services and maintain a strong military all the while paying off the debt and putting monies into future reserve funds – cut taxes and non-essential spending. This is the lesson that moribund cultural Marxists ignorantly and blindly ignore.