Tax Cuts Are Like Fertilizer (in a Good Way!)
Presidents Coolidge, Kennedy, and Reagan didn’t have a lot in common other than having “Hail to the Chief” played when they entered a room. But all three presidents understood the value of putting more money—or should I say leaving more money—in the pockets of working Americans. That money isn’t a “gift” from the government, remember. You had to work and earn it. The example each of these leaders gave us was that tax cuts increase investment, jobs, and income and generate more revenues.
When President Coolidge cut the top rate from 70 percent to 25 percent, revenues went from $719 million in 1921 to $1.164 billion in 1927. Hey, in those days, a billion dollars was a lot of money! He also lowered the national debt by 33 percent and ran a surplus every year he was in office. “Silent Cal,” as they called him, may not have said much, but in this case, actions spoke louder than words anyway.
When President Kennedy cut the top rate from 90 percent to 70 percent, revenues went from $94 billion in 1961 to $153 billion in 1968. His tax cuts led to a three-billion-dollar surplus. President Kennedy was neither a conservative nor a Republican, yet he recognized that “the soundest way to raise revenues in the long run is to cut the [income tax] rates now.”
When President Reagan cut the top rate from 70 percent to 28 percent, revenues went from $517 billion in 1980 to over a trillion in 1990. When the Reagan tax cuts took effect in 1983, real growth (not just inflationary growth) jumped 7.5 percent in 1983 and 5.5 percent in 1984, after no growth in 1981 and 1982. Our GDP grew by a third during Reagan’s two terms.
And the Reagan cuts didn’t just benefit the rich, as some would have you believe. Americans at all income levels prospered during his presidency. From 1981 to 1989, the number of Americans making less than ten thousand dollars fell by almost 3.5 million. By 1989, 2.5 million more Americans earned upwards of $75,000 than had in 1981, and almost six million more Americans earned more than fifty thousand dollars. African Americans saw their incomes rise 11 percent under Reagan, compared to 9.8 percent for whites.
Given these examples, there’s no question that it’s wrong to let the Bush tax cuts expire in 2011 for high earners while we are trying to get our economy expanding again. Those earners are responsible for a great deal of the consumer spending that accounts for 70 percent of our economy—spending we need to emerge on a strong and sustainable footing from the Great Recession. Further, higher tax rates mean less money available for investment and job creation, since half of all business profits, particularly those earned by small businesses, are taxed at personal rates rather than the corporate rate.
Nicole Gelinas of the Manhattan Institute notes that newly enacted tax increases (the top tax rate going from 35 percent to 39.6 percent in 2011 and the new 3.8 percent tax on investment income of upper-income people starting in 2013 to help pay for ObamaCare) will, perversely, shift money away from the private sector, where we need it to go, while encouraging state and local governments to keep spending instead of getting their houses in order. That’s because the tax increases will cause upper-income Americans to put more money in tax-exempt local and state bonds, so those entities will just keep growing. But as she points out, eventually the rich will be so squeezed that taxes will be raised for everybody.
Corporations Are Not the Enemy
Most Americans I know understand that corporations shouldn’t be tax mules for the government. Corporations are like the canary in the coal mine of the US. economy—when they do well, it’s a sign that workers will do well, and the economy thrives. However, the opposite is often just as true. Michael Boskin, who is now an economics professor at Stanford and a senior fellow at the Hoover Institution and was chairman of the Council of Economic Advisers under Bush 41, explains: “Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth, in both the short and long run, increase America’s global competitiveness, and raise future wages.”
The U.S. statutory corporate tax rate is 40 percent. The effective corporate tax rate (when you add state corporate taxes and deduct federal tax breaks) is about 35 percent—higher than in any of the other thirty-three countries in the Organization for Economic Cooperation and Development (OECD). It’s significantly higher than the average OECD effective rate of 19.5 percent or the average G7 effective rate of 29 percent.
In the last ten years, twenty-seven of the thirty-three other countries in the OECD have reduced their corporate tax rates by an average rate of about 7 percent. This makes that “level playing field” you always hear about when people discuss international trade a little less level. It makes us less able to compete. And as capital becomes ever more mobile, this inability to compete will just become more pronounced unless we do something about our tax rates.
To create more investments, we would be much better off reducing the corporate tax rate than making the targeted and temporary tax cuts (such as bonus depreciation) that Congress typically does. Companies and their investors need to be able to rely on tax rates, rather than hoping for special, occasional breaks at Congress’s whim.
If we cut corporate taxes, companies would have less incentive to move their investments and profits overseas, foreign companies would have more incentive to invest here, and we would increase jobs, wages, and tax revenues in the process.
Raising Taxes Is Not the Answer
Data from the past sixty years have shown the close relationship between federal tax revenues and GDP. The government can raise tax rates, but it can’t make revenues rise to more than about 19 percent of GDP. Kurt Hauser of the Hoover Institution first pointed out this ratio about twenty years ago, and it has remained just as true ever since. When the government predicts that it will get more revenue through higher rates, it is always wrong because it doesn’t account for the ways people change their behavior and manipulate the tax code in reaction to the higher rates. When we look at the CBO’s projections for the next decade, we can safely assume that its assumption of increased tax revenues from the higher rates starting in 2011 is wrong, which of course means its projections about deficits are wrong.
As of this writing, Congress is in the process of raising the tax rate on “carried interest” from the capital-gains rate (which itself is going from 15 percent to 20 percent) to as high as 38.5 percent. This is going to discourage long-term capital investment just when we should be encouraging it.
When we want to discourage a behavior, like smoking, we tax it more. Why on earth would we want to penalize long-term investment in one of America’s largest industries, whether automotive or steel, now, as we are trying to get companies going and growing and Americans back to work? If you were trying to come up with a counterproductive tax increase to slow growth and kill job creation, this would be it.
This reduction in after-tax returns means money will be diverted from the partnerships that are our main source of long-term investments. Venture capital will dry up. Nothing ventured by investors, nothing gained by American workers. This change is a dangerous abandonment of our long-standing tradition of taxing long-term investments at a lower rate than short-term investments, to reward those who are willing to invest in America and wait patiently for results rather than just pursue the quick buck. It makes you wonder whose side Congress is on. Do they really prefer money going out for unemployment benefits, food stamps, and Medicaid, rather than money flowing in from more working Americans?
Why “Fair Tax” Isn’t an Oxymoron
A 2008 study from the OECD found that the taxes “most harmful for growth” are corporate taxes, followed by personal income taxes. Consumption taxes are least harmful. Nobel laureate Robert Lucas believes that eliminating corporate and personal income taxes in favor of a consumption tax is “the largest genuinely true free lunch I have seen.”
As many of you may know, I am a longtime supporter of the FairTax. Why? The answer is in the name—it’s fair! Imagine a world where you could chose how you spend your money—where
you could choose how much tax you pay based on what you buy instead of the government deciding how much you owe based on what you earn. That’s the FairTax. In a nutshell, the FairTax would levy a nationwide national sales tax while doing away with the federal income and payroll taxes, as well as estate, gift, capital-gains, self-employment, Social Security/ Medicare, and corporate taxes. Beyond that, it would repeal the Sixteenth Amendment, allow Americans to take home 100 percent of their paychecks (unless they live in a state with its own income tax), and end compliance costs built in to the goods and services we buy. Not to mention, the IRS would be dismantled, as the national sales tax would largely be handled by existing state sales tax infrastructures.
Another feature of the FairTax that makes it unique is the “prebate.” In order to make sure no one is taxed on the essentials of life, every registered American household would receive a monthly rebate check (prebate) to cover the sales tax on essentials up to the poverty level. This basically “un-taxes” the poor, lowers the general tax burden on most Americans, and makes the tax system progressive based on spending choices. No longer would those who are successful be penalized for their success by being stuck in a high tax bracket. They’d pay taxes commensurate with their spending choices. That’s certainly not the tax code we’ve come to know and “love,” is it? Why, it’s almost fair, not to mention rather simple.
Avoiding Another Housing Bubble
Under the FairTax, people wouldn’t be pushed into buying a house to get tax breaks when they’d rather rent. If there’s one thing we’ve learned in the last two years, it’s that sometimes it actually makes sense to rent. The FairTax would give Americans more freedom to live how they wish, rather than encourage them to buy houses they can’t afford, as did Fannie Mae and Freddie Mac and the subprime scheme. It’s also better for the government because, according to the Congressional Budget Office, all the tax breaks and subsidies for home ownership cost $230 billion in 2009. It’s fairer for renters because they’re not put at an unfair tax disadvantage. It’s also better for those who choose to own but don’t want to see their investment destroyed in a bubble.
Richard Florida, an economist from the University of Toronto, has determined that the areas that suffered the least from the housing crisis were those with the highest number of renters. The FairTax would end the distortion of the housing market, which has brutally distorted our overall economy.
Declare Those Pennies on Your Eyes
Benjamin Franklin told us the only two certainties in life are death and taxes. But there’s something particularly distasteful about a “death tax.”
Did you know that due to a quirk in the law, 2010 was the only time since 1916 that heirs didn’t have to pay a federal inheritance tax? The reason this came about was nearly as complicated as the tax code itself. The 2001 tax-relief package passed by Congress gradually phased out the inheritance tax over ten years. But because the tax-relief bill was passed under “budget reconciliation rules,” the policy couldn’t extend beyond a ten-year budget window. So in 2011, the death tax—known in more polite circles as the “estate tax”—gets resuscitated, and at full 2001-level strength. Kind of like the end of a Friday the 13th movie—just when you think Jason’s dead and the credits are about to roll, he jumps out of the lake to pull an unsuspecting victim down with him.
In 2010, we lost baseball icon George Steinbrenner, owner of the New York Yankees and (just as important to me) a recurring character on Seinfeld. Steinbrenner was larger than life and an astute businessman. It’s estimated that his estate at the time of his death was somewhere in the ballpark (excuse the pun) of $1.1 billion. If Steinbrenner had died in 2009, his heirs would have been hit with a tax bill of about $500 million. As it is, they’ll still have to pay capital-gains taxes on assets should they be sold, but what will no doubt be avoided is a repeat of what happened to the Wrigley family in Chicago in the 1970s.
When Chicago Cubs owner P. K. Wrigley died in 1977, the inheritance tax devastated his family and forced them to sell the team to the Tribune Company in order to meet the huge tax burden on the estate. Who knows what would have happened had George Steinbrenner’s family been in a similar position?
Now, admittedly, this is a huge problem of the wealthy. But it’s also a problem for the rest of us because the death tax undermines job creation. A 2003 study by economist William W. Beach found that eliminating the estate tax would create between 170,000 and 250,000 jobs. And a study conducted by Douglas Holtz-Eakin and Cameron Smith in 2009 found that full repeal of the tax would create 1.5 million jobs.
The Heritage Foundation estimates that repealing the death tax would increase small-business capital by $1.6 trillion, increase the probability of hiring by 8.6 percent, increase payrolls by 2.6 percent, and expand investment by 3 percent.
Compare the benefits of repealing the estate tax to the benefits of the $862 billion stimulus funding intended to invigorate the economy, and I think you’ll agree—it’s time to bury the death tax.
Something Smell Fishy to You?
In July 2010, the inflatable dam on Tempe Town Lake in Tempe, Arizona, burst, releasing almost a billion gallons of water down the usually dry Salt River bed in just a few short hours. Luckily, no one was injured in the episode . . . well, almost no one—fish casualties were high.
What was left was a stinking, muddy lake bed and shallow pools of flopping, dying fish. Crews had to stay on top of the fish problem because carrion birds see pools of flopping fish as an all-you-can-eat buffet, and the nearby Phoenix Sky Harbor International Airport couldn’t have dive-bombing birds occupying its flight path. So something had to be done. Who wins in a situation like this? Well, in this case, local alligators from the Phoenix Herpetological Society, that get to feast on the stranded fish, making the circle of life complete.
This is not unlike what high taxes are doing to the American economy. Like a dam straining against the pressure of too much water, our economy is straining against the pressure of too many taxes. In 1913, when the Sixteenth Amendment was passed, less than 1 percent of Americans paid income tax and the top rate was 7 percent. In the 1950s and early 1960s, the top tax bracket was a whopping 91 percent. Even during the Clinton years, it topped out at nearly 40 percent.
If we continue to strain our economy like this, the dam will eventually burst, and all of the people who relied on that capital will be left flopping around like dead fish—at the mercy of the big bad alligator called government.
CHAPTER FIVE
Once Humpty Dumpty Falls, It’s Hard to Put Him Back Together
We Need a Responsible Approach to Health and Health Care
I know all too well about the dangers and struggles of obesity. It’s chased me throughout my adult life. In 2003, I lost 110 pounds and beat back early symptoms of type 2 diabetes. Since then, I have been able to live without any symptoms. As my doctor told me after I aggressively fought back with nutrition and exercise, it’s as if I was never diagnosed. That’s good news and I’m not taking it for granted. After a year of nonstop travel and gaining about thirty of those pounds back, I went back to a more focused lifestyle to again fight the “demon” of food addiction. It is a lifelong battle that many other Americans can relate to.
When I decided to get the thirty pounds off and get back to my marathon-running fitness, I went back and read my own book on the subject, Quit Digging Your Grave with a Knife and Fork. I meet people almost every day who tell me that book caused them to change their lifestyle and lose anywhere from twenty-five to two hundred pounds.
Of course, as much as I could probably flatter myself into taking credit for these people’s success, I know they could never have lost the weight without taking some personal responsibility for their own health. I’m sure plenty of doctors and specialists told them, as they did me, that they would face serious health risks if they didn’t take better care of themselves. But in the end, no amount of advice or warnings can make up for a lack of effort on the part of the patient.
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And as much as I love hearing weight-loss success stories like these, I know that for every person who has made the commitment to eat right, exercise, and lead a healthier lifestyle, there’s at least one more who still opts for the Twinkies and TV over carrots and cardio. And sooner or later, these folks end up at the doctor’s office or worse, the emergency room, undergoing expensive procedures and treatments that could have been avoided with a few more good decisions.
What does this have to do with health care? It’s simple, really. No matter what kind of health-care system we have, the only way to really manage costs and reduce wasteful procedures and medicines is to take some responsibility for our own health. After all, at the most fundamental level, we don’t really face a health-care crisis; we face a health crisis.
If We Can’t Take Care of Ourselves, No One Can
About 75 percent of our health-care costs are from four chronic conditions: heart disease, cancer, diabetes, and obesity. Besides being the most expensive diseases, they are also the most preventable. These four chronic conditions are linked to four behaviors—tobacco use, alcohol use, lack of exercise, and poor diet.
A Simple Government Page 7