The Golden Calf of Increased Tax Rates
Let me open by saying that if economics is a religion for you and your golden calf is government than you are already immune to logic and continuing with this piece any further is a waste of your time. It is with regret that I must preface this writing in such a way but I found during my nearly two-year campaign for the U.S. Senate in Maryland that no matter how powerful the argument against liberal economic policies there are some that are simply calcified in their beliefs. It is disturbing to watch a growing number of politicians, who fully understand the consequences of detrimental tax policy, begin to cower to those who perpetually yearn for more of your money.
The current fight to hike tax rates flies in the face of logic and in the interests of keeping the argument simple I want to address it from three fronts, tax rates and their effects on behavior, what the study of economics tells us about tax rates and the morality of increasing tax rates.
Human behavior is difficult to predict with certainty but when viewed collectively very specific patterns emerge. The laws of psychology and operant conditioning tell us that a response that is rewarded will generally increase in frequency while a response which is punished will decrease in frequency. An increase in tax rates will follow the same pattern. When people view a tax rate hike as detrimental to their financial situation, they will avoid it. A growing, international economy presents a number of ways to do just that. Investing money in low-tax regions, declaring your income as capital gains, investing in tax free-assets, or, the most pernicious, liquidating your assets to avoid the penalty. If you worship at the altar of a bigger government this may make you uncomfortable and you may not approve but I regret to inform you that the people avoiding paying rates, which they view as detrimental to them, don’t care. They are not going to ask you for your opinion on the matter and will allow you to continue to bluster while they move their money and wait you out. Don’t fret, the money will return when the rates are cut and tax revenue will increase, just not on your watch. To further drive home the point, the largest amount of revenue ever collected by the U.S. government, in inflation-adjusted dollars, was in 2007 under the current tax rates which some now clamor to raise.
Tax rates are one of the few areas where liberals appear to abandon the economic principle of marginality. Heat is good, to a point, water is helpful, to a point, and food is a necessity but only to a degree. When the current crop of liberals speak about tax rates and new and creative taxes they seem to think every increase in rates on a growing number of products and services are benevolent regardless of the degree. No one claims that food is benevolent regardless of the degree to which we consume it. Food at a sustenance level is a life or death necessity but can cause death when consumed in abundance. Like food, taxes follow similar rules. When we find that tax “sweet spot”, that rate which generates government revenue and allows for prosperous economic growth, shouldn’t that make partisans on both sides happy? Sadly it does not. Despite mounds of evidence that increasing tax rates beyond that “sweet spot” stifles economic growth and may actually decrease revenue, liberals continue to defy logic and move “forward”.
Economics and a degree of common sense also tells us that we will always be more cautious in spending our money than a third party will be. Milton Friedman used this brief explanation to drive home the point. There are four ways to spend money. You can spend your money on yourself, and when you do both the cost of the product and the quality matters. You can spend your money on someone else, in this case cost matters but quality is not as important. Other people can spend other people’s money on themselves, in this case cost doesn’t matter, as it is not your money, but quality does as you are buying the product or service for yourself. Finally, the most inefficient method to spend money of the four is other people, spending other people’s money, on other people. Cost doesn’t matter because it is not your money and quality doesn’t matter because it is not your product or service either. In the final case, I just described to you government spending. And, to be clear, government spending is taxation, while deficit spending is future taxation plus interest. It cannot be any other way. Arguing that accumulating debt on your personal credit card is not going to require you to take money from your account in the future to pay the debt is foolish, therefore, why would you think that the national credit card would obey a different set of economic rules?
Finally, we are frequently rhetorically assaulted by the “fair share” moralists on the left. This is an argument where they are correct on principle and completely devoid of substance regarding evidence. We are, and should remain, a just and moral country and should always strive for a system which levels the field of play. The problem with a tax code loaded with loopholes and with rates which increase for one group of businesses and people only, in the name of class warfare, is that the revenue eventually falls as the rates increase and paradoxically, the increased burden falls on the middle-class taxpayer. The wealthy are able to exploit loopholes on higher rates because hypocritical politicians on the left must vote for the loopholes or the businesses, and the wealthy, simply move their money, and the revenue to finance their big government projects disappears (i.e. Gov Quinn in Illinois). Ironically, it is JFK who once stated, “The paradoxical truth is that the tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut rates now.” What is moral about promising a box of gifts and delivering a box of air-popcorn as liberal ideology typically does? In addition, these same “fair share” moralists rarely, if ever, voluntarily pay more in income taxes. I met a liberal gentlemen at a wedding about a year ago and he impressed me quickly with his incredible dedication to a charity he was running. As we began to converse about the role of government I asked him a simple question as he passionately defended a bigger government and fewer individual liberties, I asked “why is it that you voluntarily give large sums of your own hard-earned money to your charity which you clearly are passionate about but when it comes to a government you claim to be equally passionate about, you claim every tax deduction you can to avoid giving it one extra dime?” He seemed perplexed and did not have an answer. We became friends and he eventually donated to my campaign.
Dan Bongino, served in the United States Secret Service for more than a decade and was assigned to the elite Presidential Protective Division. He represented the U.S. as a lead government security official in over 25 countries. Holding graduate degrees in Business Administration and Psychology, Dan has also developed several successful businesses in Maryland. He was the 2012 Republican nominee for U.S. Senate from the state of Maryland. You can follow Dan on Twitter at @dbongino and on Facebook at https://www.facebook.com/dan.bongino