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.