Wednesday, February 3, 2016

"I heard he wants to raise taxes" -- you heard right, and it's going to hurt

The new website I Like Bernie, But... tries to calm people's fears about Bernie Sander's socialist extremism.  It states questions reflecting concerns that people might have about Bernie, and then provides pithy little answers refuting those fears.

In a previous post, I addressed the myriad falsehoods, omissions, and misconceptions in the website's assurance that Bernie isn't a dangerous socialist, he's a good socialist. This post addresses the misleading answer to a concern that "I heard he [Bernie] wants to raise taxes."

Here's what I Like Bernie, But.... has to say about Bernie and taxes:

That's simply false. Here's the truth:

To fund his proposed 18 trillion dollars in new spending, Bernie is going to tax everybody and tax them hard.  This is not a Republican viewpoint.  This comes from Vox, a internet media outlet known for its strong Progressive orientation.

Writing at Vox, Dylan Matthews took a look at the Tax Code if Bernie is allowed to go forward with his plans to socialize medicine; make college free for everyone, although he's already conceded that college graduates aren't getting jobs as matters stand now; revamp America's infrastructure, something Obama promised but failed to do; have the government create jobs for young people, a ridiculous scheme that Milton Friedman destroys with a single question about spoons; expanding Social Security, a program that is already going broke and suck vast amounts of money out of the federal budget; and a whole bunch of other, smaller programs.

The first thing you need to understand, before we even get to the numbers, is that if you imposed a 100% tax rate on every single "rich" person in America (from the super rich to the pretty darn comfortable), you might be able to fund Bernie's plans for a month or so.  Even if you followed  that up by confiscating the assets from these same "rich" people, you still wouldn't be able to pay for even a fraction of Bernie's plans.

Don't believe me?  Check out this video made when the Occupy Protesters started demanding that the 1% pay for everything:

If you don't have time to watch a 9 minute video, you can get the same information from a clear and funny post entitled "Feed Your Family on $10 Billion a Day."  Whether you watch the video or read the post, you will learn more about actual money than you will if you spent weeks following Bernie around listening to his economically ignorant statements about money and wealth.

After watching the video or reading the post, you will know with absolute certainty that "the rich" cannot fund Bernie's grandiose plans.  That means that other people are going to be tapped for money -- and you might be surprised at how far down the economic food chain that tapping goes.  Let's go back to that Vox article (remember, this is a Progressive publication), to see what even Left leaning out let has to say.

Matthews notes that Bernie likes to throw out big, conclusory answers when he's asked where the money will come from for his plans:
And for every plan, he's got an idea to pay for it. College? Slap a financial transactions tax on Wall Street. Infrastructure? Tax corporations on profits they earn abroad. Single-payer? Raise income and payroll taxes, and then a bunch of others too
While Sanders tends to portray these as separate ideas with separate financing, I thought it'd be worth adding them up and seeing what the tax code looks like with all of them. I looked specifically at his changes to personal income, payroll, and capital gains tax rates.
What Matthews discovered when he "looked specifically" at Bernie's tax changes is that all Americans will need to pay more taxes -- often significantly more taxes from those who can ill-afford them -- to finance Bernie Sander's dream of a government that will provide everything for everybody.  For clarity's sake, Matthews leads with a graphic showing that everybody will be paying marginal increases on their taxes, whether they can afford it or not:

There's no doubt that those making more than $250,000 a year will bear the greatest burden under the new tax scheme:
Most taxpayers would see a single-digit increase in their marginal tax rate. People with taxable income below $250,000 would see an 8.8 percentage point increase.
But the very rich would see eye-popping increases in marginal rates: from 36.8 percent to 62 percent for people with taxable income between $250,000 and $413,350. The big change here is applying the Social Security payroll tax, which adds another 12.4 points.
For the very richest Americans, with more than $10 million in taxable income, Sanders's proposal would produce a 77 percent marginal rate. That's not unprecedented — under Dwight Eisenhower, the top income tax rate was 91 percent — but it's higher than the top rate at any point since 1964.
If you're wondering, there's a reason that America did away with those top rates back in 1964:  High top rates don't bring in more money.  The reality is that the rich are better than anyone at protecting their money from what they perceive as unreasonable income taxes.  They take it offshore, shelter it, hide it and, most importantly, refuse to invest it, leaving their wealth unavailable to the rest of the country for such useful things as business start-ups, employment, exploring innovative ideas, etc.

The clearest representation of the damage too-high taxes do to an economy is the "Laffer Curve," which Art Laffer came up with more than 40 years ago.  It's a simple premise:  If you make it too expensive for people to make money, they'll stop making money.  Here's a more comprehensive explanation:

As drawn, the Laffer Curve shows that at a tax rate of 0%, the government would collect no tax revenue, just as it would collect no tax revenue at a tax rate of 100% because no one would be willing to work for an after-tax wage of zero. The reason for this is that tax rates have two effects on revenues: one is arithmetic, the other economic. The arithmetic effect is static, meaning that if rates are lowered, the tax revenues per dollar of tax base will be lowered by the amount of the decrease in the rate, and vice versa for increasing tax rates. In other words, this is what happens when a hypothetical 1% tax collects $1 million, so people assume that a 2% tax would collect $2 million… and a 5% tax would collect $5 million. Likewise, under the same scenario people would similarly assume that a .5% tax rate reduction would collect only $500,000.
That's all very easy to say, but how does the Laffer Curve really work?  Well, it turns out that, when put to the test of real world economics, the Laffer Curve performs as predicted:
Solid supporting evidence came during the Reagan years. President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.
When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such asTed Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation). Economist Larry Lindsey has documented from IRS data that tax collections from the rich surged much faster than that.
Reagan’s tax policy, and the slaying of double-digit inflation rates, helped launch one of the longest and strongest periods of prosperity in American history. Between 1982 and 2000, the Dow Jones industrial average would surge to 11,000 from less than 800; the nation’s net worth would quadruple, to $44 trillion from $11 trillion; and the United States would produce nearly 40 million new jobs.
Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates. Except that 30 years later, President Obama would run deficits as a share of GDP twice as large as Reagan’s through traditional Keynesian spending programs, and the economy grew under Obama’s recovery only half as fast.
All of this boils down to a single point:  If Bernie's tax plan goes into effect, over time there will be less money available to the government, not more.  People will earn less, create less, innovate less, spend less, and invest less.  It just won't be worth it.

For the first year or two of the new, higher tax rates, the rates will look successful, because they'll sweep in money already created through investing, earning, innovation, etc.  After that, though, the tax revenues will slide steadily as the economy becomes more and more sluggish (sort of like it is now, almost 8 years into the current recession).

At this point, if you doubt the problems with high taxes, you might be inclined to point out that the stock market is booming.  However, if you've really been paying attention, you might also have noticed that this boom is entirely unrelated to job creation and other signs of a thriving economy.

What's happened is that, in a high regulation, high tax, unstable environment, the rich, rather than investing (and risking) their money in job and wealth creation, are just storing it in the stock market, waiting for a sign that investment will be less risky.  With Bernie's proposed capital gains tax (going from an already high, compared to Europe, rate of 23.8% to a new high of 64.2% at the very top), most investment would stop altogether.

Again, don't believe me (a conservative); believe Vox, a Progressive publication:
The Sanders campaign estimates they'll earn $92 billion a year from taxing capital gains the same as wages. But there's reason to think they'll actually lose revenue.

One thing that happens when you increase the capital gains rate is that people stop selling assets — and thus realizing gains on capital that can be taxed — as frequently. That means there's a point beyond which raising the capital gains tax would reduce sales so much that revenue actually falls.

Note that this is a very different question from whether taxing capital gains at a high rate hurts economic growth. Many economists think it does, but that effect would reduce revenue by lowering the price at which assets are sold, not making them less likely to be sold in the first place. The latter is a different effect whose existence is much less controversial.
By the way, if you're tired of hypotheticals and what to see what it looks like in places where Bernie's financial plans have already been put into effect, look around the world:  Most of Europe is an economic basket case thanks to the withdrawal of American Cold War funding, the 2008 recession, the dramatic drop in birth rates, and the influx of immigrants who drew on the system without funding it, all of which made it impossible for European countries to continue what was essential a Ponzi scheme, whereby they kept taxing the up-and-coming generation of workers to pay for the perks accorded older people.

An even better example is Venezuela, which had such a rapid decline after socialization that you can see the problems playing out before your eyes.  Venezuela implemented Bernie's socialism a few years ago and went from being one of the most prosperous Latin American nations (thanks to oil revenue) to being flat-out broke, with shortages of everything from food to toilet paper to (ironically) oil.

Government manages money very badly.  When you have your own money, you presumably worked hard for it and depend a great deal on it. You'll therefore be careful with it, and quite possibly want to do things that make you earn more of it.

Government is different.  The government workers who are making decisions about and spending your money didn't earn that money.  They won't be affected if they spend it unwisely.

Worse, when they run out of your money thanks to unwise management, they don't have to work for more. Instead, they just have to demand more, since they have the vast punitive power of the government at their back to take that money from you.  (Robin Hood, incidentally, didn't steal from the rich; he stole from the tax collectors, and gave the money back to the taxpayers.)

And one final point about those managers:  As a friend reminded me, F. A. Hayek's The Road to Serfdom makes the point that it doesn't matter how good, honest, and caring the manager is.  There is simply no way for one person or government department to accumulate enough knowledge about what's going on in the economy for that person or department to make good decisions.

Even with powerful computers and all the technology of the 21st Century, the knowledge needed is so diffuse through the country and the population that shortages WILL occur....and then the attempt to deal with them will make things worse, and so on and on, ad infinitum.

Here's the bottom line:  Governments do not create wealth.  The only way they get money is to take it from people who have earned it.  They then hand that money out to favored constituencies, picking winners and losers as they go.  Invariably, because government is slow, inefficient, and cares more about reward friends and punishing enemies than profits and losses, the money dribbles away, having enriched a few and impoverished many.

At the end of the day when the government takes it upon itself to be the money manager -- to suck up everyone's wealth through constantly increasing taxes, and then itself to run the businesses and make the calls -- everyone ends up poorer.  Just ask the people in Venezuela.

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