Can Taxing the Rich Benefit the Economy?

Right From the Start

The normal orthodoxy for conservatives is to eschew tax increases – particularly during economic downturns. It is done in the certain knowledge that increased taxes remove investment capital from the economy at the very moment when investment capital represents the critical path for economic expansion. It is also done with the historical knowledge that government wastes an inordinate amount of its expenditures through fraud, graft, corruption, duplications and ineffective management. The recent examples of ACORN, Solyndra and the payments to “security firms” in Iraq and Afghanistan are just the most recent reminders that government is a poor steward of the people’s money.

I generally adhere to that orthodoxy as evidenced by my previous columns. But these are extraordinary times made worse by government interference. The recession was made worse by the collapse of the housing market that was over stimulated by federal requirements to loan money to those who could not or would not repay them. President George W. Bush, almost singularly focused on the wars in Afghanistan and Iraq, failed to provide the leadership necessary to monitor and correct the lending practices while Congressional Democrats blocked all legitimate attempts to investigate and remedy these programs on a timely basis.

The problem was made all the worse by the financial institutions, speculators and hedge fund managers who packaged, leveraged and obscured the underlying value of the assets, all of which was aided and abetted by Democrat operatives at Fanny Mae and Freddie Mac. Billions were made in this process, not by venture capitalists but by Wall Street traders – the subsequent significant financial supporters of President Barack Obama. While the underlying problems may have begun during Mr. Bush’s administration, they were assisted and finagled by Congressional Democrats, including Mr. Obama. (I make a marked distinction between the venture capitalists who provide the capital for commencement, growth and restructuring of businesses and those who package, leverage, speculate and obfuscate financial instruments.)

The net effect was to convert what might normally be an over supply in the housing market into a gigantic excess of supply coupled with a highly leveraged supply of financial instruments rendered virtually worthless by the excessive valuations of property that borrowers could no longer afford. The simultaneous collapse of the housing market and the financial markets put the nation at a point of near total collapse.

The recovery from that recession has been dampened and delayed by Mr. Obama’s administration through a focus on a series of ideological imperatives coupled with massive spending including the vaunted – but completely wasted – nearly $1 Trillion “stimulus package.” Mr. Obama and his allies in the Democrat controlled Congress treated the stimulus as a political slush fund designed to reward supporters on Wall Street, the public employee unions and the environmentalists. While the nation was wallowing in the recession and real unemployment grew well beyond the numbers receiving unemployment compensation, Mr. Obama focused almost exclusively on a quest to take over the healthcare industry through Obamacare and decimate the fossil fuel energy industry through a series of mining and drilling bans, increased regulations and massive taxpayer funded subsidies to alternative – and unsustainable – energy schemes.

That made it two presidents in a row. Mr. Bush ignored abuses occurring on his watch which led to the recession and Mr. Obama ignored the critical requirements for recovery which has led to the depth of the recession and the delay of a healthy recovery. Meanwhile both contributed substantially to the superheated growth in the national debt to a point where it threatens to overwhelm government resources.

And as the economy continues to stagnate neither Mr. Obama nor the Congressional leadership seek a solution rather only an electoral advantage. It is disgusting that public officials on both sides of the aisle have so abandoned the well being of their country in their quests for power.

The Simpson-Bowles Commission made difficult recommendations for a path out of the current fiscal crises through a series of spending reductions, entitlement reforms and tax increases. Mr. Obama immediately threw them in the trashcan and the Congress has done nothing to recover them. Mr. Obama’s solution, having wasted the stimulus, is to increase taxes on the rich, not to cure the economy but rather to increase government spending.

And it is here that I can depart from the conservative orthodoxy and suggest common ground to Mr. Obama – although recent history would suggest Mr. Obama disdains common ground in favor of “in your face” political practices.

Because these are uncommon times, I would support a tax increase of limited duration on those earning in excess of $500,000 per year. The revenue generated would be used exclusively to reduce the principle of the national debt and when the national debt has been reduced to fifty percent of Gross Domestic Product (slightly above the average since the conclusion of World War II) the tax will be eliminated. In order to ensure this would happen without the President and/or the Congress manipulating the process the national debt would have to be capped at its current authorization – this would allow a small amount of growth while Congress implemented the necessary reforms to eliminate future deficit spending. The current authorized cap would thereafter be reduced annually by the amount of revenue generated through the temporary tax increase until it reached the fifty percent of GDP level and thereafter would be tagged to the GDP growth. An exception in case of war or other national emergency should be made but should also require a two-thirds vote of each house of Congress.

Will it work? Absolutely – it is a mathematical certainty. Will it be implemented? No. Mr. Obama treats taxes as a form of punishment in his pursuit of class warfare and he is singularly fixated on enlarging the welfare state and, therefore, government dependency of a substantial majority of voters. The Republicans continue to advance tax cuts as the sole solution in hopes that there will be sufficient stimulus to grow out of debt crises. Neither is realistic. Only a direct attack on curbing the national debt will affect a positive change in both economic growth and governmental program reforms.

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Posted by at 05:00 | Posted in Economy, Federal Budget, President Obama, Taxes | 28 Comments |Email This Post Email This Post |Print This Post Print This Post
  • scatcatpdx

    (I am sorry for the format It is impossible for me to post with just seeing two lines)
    There are two fallacies and one immoral position your scheme
    makesy war spending and spending in contrast to the national debt except
    money that could go to investment
    is going to pay interest in the debt. Your rational detracts from the real issues of
    uncontrolled spending. We need not to push our debt bill on rich; as if they
    are not paying enough for our national
    spending. You can look at CBO number of tax played by percentile.

    Secondly originally I was going to appeal to Bastiat’s
    Broken Window parable but what you propose is far worst; the economic
    equivalent of the pre modern medical practice of bleeding .In your rational,
    are you proposing to take more of the life blood of the economy in order to fix
    the problem of a broke window of debt? You
    have failed to account for the ramifications, higher taxes for any reason will account
    for lower investment, in turn lower economic
    growth, and lower revenue generated by tax increase. We already see this as
    played out by measure 66 and 67 in Oregon. I do not see how increasing taxes will result
    in much effect to lower debt by driving down economic activity.

    Finally I find taxing a minority because they have more as a grievous offence before God and man. I would have better respect if still wrong by
    proposing a tax increase across the board.

    Soaking the rich, how immoral it sound, will not solve the problem,
    as Regan has demonstrated lowering taxes result in higher revenue. The trick is
    to see any increase of revenue directed to lowing debt rather than feeding the
    public trough. Lowing taxes need to be coupled
    with reducing spending especially entitlement and so called stimulus spending.
    I see growth of entitlement spending as more of a threat than national
    debt by increasing the number of depended while reducing producers via the need
    for higher taxes. We end up with more pirates and less wealthy to pilferage and

    • valley person

      “Finally I find taxing a minority because they have more as a grievous offence before God and man”

      Interesting. Which religion advocates taxing those with less than those with more?

  • Rupert in Springfield

    >Will it work? Absolutely – it is a mathematical certainty.

    No, because mathematical certainty is only part of the equation. One congress cannot bind over the next congress. Therefore there is no way in hell you can legally cap the national debt.

    Second, there is no way legally you can bind the congress over on spending of the taxes you suggest. They can spend them any way they want to.

    Third, I don’t even think this is mathematically certain. The money simply isn’t there in the taxes suggested to reduce the national debt in any meaningful manner.

    Note that I said meaningful. Every time I look at increasing taxes on the rich it always comes back that it doesn’t really do much. You always dopey nonsense like the Buffet rule, which would pay off our 2011 deficit in something like 200 years the last time I calculated it.

    I simply don’t see much point in running the very real risk of dampening the horrendously weak growth we have already, for some amount of revenues that even if it were all used to pay down the debt, would do so on a geologic time scale.

    We are in the weakest economic recovery ever, lets not risk making things worse. It’s far better to wait out the current administration for better times than to risk worse times with higher taxes.

  • valley person

    From a macro economic perspective, why would we want to pay down the debt at a time when continued public debt is the only thing standing between slow to moderate GDP growth and another recession?

    When we have been growing for a while, and when unemployment is down to reasonable levels, that would be a good time to start reducing the debt. Until then, borrow and spend is our friend.

    • Oregon Engineer

      rack up those credit cards. You can’t have too many credit cards. SPEND SPEND SPEND. there is no limit to borrowing.

      • 3H

        I think he was talking about governmental fiscal policy, not personal spending decisions. There is a big difference.

        • valley person

          Don’t confuse the poor guy.

  • Casandra Red Feather

    Por favor, Larry, have you too begun to drink the kool aid?? Do you honestly believe that imposing a higher tax rate on those earning $500 K plus per year is really EVER going to reduce the national deficit to 50% of GDP? And shockingly, you are willing to accept the increase until it does so. In other words, make it PERMANENT. Maybe in a perfect world, where all spending would abruptly cease, but in the real world the god awful spending of the government would just continue unabated and there will never be sufficient funds to cover the ongoing expenses, let alone ever reduce the national debt, as long as it does. DO NOT APPEASE these Leftist Lovers of Big Government as the solution to staggering national deficits and uncontrolled government waste on the taxpayers’ dime. We need to take a machete to the federal government, not a pair of manicure scissors. The size of federal government and all of the entitlements programs need to be slashed to the bare bones. We need to empty the bank accounts of these bureaucrats and tell them that the party is over. Not more money, period, end of story. And, really, if you have the idea that those making $500K or more are not yet paying their “fair share” (As our President likes call it) then you need to study the numbers. What we REALLY NEED is for all of the freeloaders in this country to get some skin in the game. Why in the world would you agree that so few citizens should pay the freight for the enormous number of citizens who contribute absolutely nothing to run the government? 100% of the citizenry need to become financially invested in how our tax dollars are being wasted. Then perhaps we will get some real anger going in this country.

    • scatcatpdx

      How that I missed that. so we need to come up with 7.98 Trillion dollars. I do not think there not enough rich to rape to come up that amount, Then there is the effect on the GDP, higher taxes will drive down GDP as well.

  • Personally I believe Obama should include public flogging of the wealthy as just punishment for suceeding in life. Perhaps that will satisfy those who believe in Robinhood Obama Economics!

    • 3H

      What about those who simply inherited? You know.. money, culture, contacts. Do you believe being born to wealth and privilege is “suceeding in life.”?

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