Earth to Democrats/Statists/Leftists: tax breaks do not cause deficits!
If there is one economic fallacy that completely drives me crazy, it’s this one! So, in order to dispel this notion that truly defies all logic, I figured the best way to prove this point is through graphical analysis. But first, let’s define some terms relating to the three possible scenarios pertaining to government taxation and spending.
Surplus: A situation in which assets exceed liabilities, income exceeds expenditures, exports exceed imports, or profits exceed losses.1
Deficit: A situation in which liabilities exceed assets, expenditures exceed income, imports exceed exports, or losses exceed profits. 2
Balanced Budget: a budget is balanced when current expenditures are equal to receipts. 3
With those terms in mind, let’s imagine a hypothetical society. We’ll call this society Atlantis. Atlantis' government was just founded and has immediately incurred expenses for its functioning. In total, these expenditures will cost $75.00 (Hey, we’re talking Atlantean dollars here! After all, their economy is just starting off.).
No matter how much Atlantis spends greater than $0, absent tax revenue, it will never be in the positive (i.e. deficit). Spending is an expense and an expense is a negative (-). You either have spending (-) or no spending (0).
Now, let’s take a look purely on the revenue side. Let's say the government of Atlantis has imposed an income tax on all productive members of society as a source of revenue and brought in a total of $100.00.
No matter how much tax revenue Atlantis takes in greater than $0, absent any spending, it will never be in the negative. Taxes are a source of revenue and revenue is a positive (+). You either have revenue (+) or no revenue (0).
Now, let’s see what happens when the two are stacked up side by side.
Atlantis’ revenue is greater than its expenditures by $25.00. As mentioned above, this is known as a surplus.
Calvin Coolidge, America’s 30th President, once said “Collecting more taxes than is absolutely necessary is legalized robbery.” Atlantis agrees, and so it has decided to cut its income tax by 50% (For now, we'll assume everything else remains constant. And later we'll see examples of what actually happens to state coffers when taxes are raised).
Ah, we’ve arrived at the dreaded deficit and the source of all this confusion. In the beginning I asserted that the belief that tax breaks cause deficits defies logic. But it seems logical that this is exactly what happened. Spending didn’t change, taxes were cut, and now a deficit has arisen. But this is one-dimensional thinking that does not get at the fundamentals. It’s important if we are to solve a problem that we get to the fundamental nature of its cause. What the left ignores is the side of the graph the deficit resides on. It’s not coming from the revenue side but the spending side. They ignore the nature of the deficit: spending.
To further concretize my point, let’s examine just the revenue side. If it is true that tax breaks cause deficits, then we will arrive at one in this example and put this debate to rest, either way.
Let’s once again start with $100.00 of tax revenue.
From the outset, we have a surplus of $100.00. Now let’s offer a tax break and give back 50% of what we took in back to the people. Now remember, the mindset is that tax breaks cause deficits, so we should surely arrive at a deficit after enacting this tax break...
Hmmm… no deficit. We just hacked the revenue a whopping 50% and not only did we not arrive at a deficit, on the contrary, we still have a surplus. No matter how much we lower taxes, we will still have a surplus until the point where we take in no revenue, where we will ultimately reach $0.00. There is no possible way to get into negative territory. The fundamental truth to be gained here is that there can be no deficit without spending.
Keep in mind in order to make that point, assumptions were made above that everything else remained constant. In actuality, tax revenue is known to increase when tax rates are lowered. There is a plethora of evidence that shows government revenue actually decreases when taxes are raised, especially on the rich, and increases when taxes are lowered. It has a lot to do with the fact that lowering taxes allows more money into the private sector leading to greater and more efficient use of capital visa vi investments in start-up companies and expansion of already established businesses. Also, people are less inclined to seek out loopholes in the tax code when they perceive their rate of taxation to not be oppressive.
A great example of this phenomenon is what happened in Oregon in 2010. Reported by The Wall Street Journal, "Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected... One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did."4 Can somebody say "Who is John Galt?"
But this scenario is not exclusive to Oregon. Another similar case played out in New York a few years back. Then Governor Paterson is quoted as saying "We increased the income tax for millionaires last year. We projected that we would get $4 billion and we actually got well short of it. Tax the rich, tax the rich. We've done that. We've probably lost jobs and driven people out of the state."5
And how about the state of Maryland? "We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues... Well, the state comptroller's office now has final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million."6
So the left says tax breaks cause deficits but in reality tax increases actually bring in less revenue. I guess another truth to be gained from this is that wishful thinking clouds all reason.
Final Word:
I am unequivocally against all forms of coercive taxation. The reason is simple: a person who does not get to keep the products of his labor is a slave. At tho point one might ask "But who will fund the government?" This saying succinctly makes my point: 'I don't need to know who is going to pick the cotton to know that slavery is wrong.'
But for those who are still unsettled by that unanswered question, a great mind at The Objective Standard, Craig Biddle, has written on exactly this subject with an article entitled "How Would Government Be Funded in a Free Society?" (The link offers just a preview of the article but it's well worth the purchase price.)
Now, the unfortunate reality is we live in a country that has imposed an immoral right's violating income tax. With that knowledge, currently the best we can ask of our government is to act in the most moral way possible. When faced with a deficit, the more moral and more responsible thing to do is not to further violate one's rights by increasing taxes (we know from examples above that this also lacks practicality), but to reduce the spending, reduce the burden on the people, and bring the budget into balance. Not only is it a moral imperative for our government to do so, our future quality of life is depending on it!
Final Word:
I am unequivocally against all forms of coercive taxation. The reason is simple: a person who does not get to keep the products of his labor is a slave. At tho point one might ask "But who will fund the government?" This saying succinctly makes my point: 'I don't need to know who is going to pick the cotton to know that slavery is wrong.'
But for those who are still unsettled by that unanswered question, a great mind at The Objective Standard, Craig Biddle, has written on exactly this subject with an article entitled "How Would Government Be Funded in a Free Society?" (The link offers just a preview of the article but it's well worth the purchase price.)
Now, the unfortunate reality is we live in a country that has imposed an immoral right's violating income tax. With that knowledge, currently the best we can ask of our government is to act in the most moral way possible. When faced with a deficit, the more moral and more responsible thing to do is not to further violate one's rights by increasing taxes (we know from examples above that this also lacks practicality), but to reduce the spending, reduce the burden on the people, and bring the budget into balance. Not only is it a moral imperative for our government to do so, our future quality of life is depending on it!
----------------------------------------------------------------------------------------------------------
Sources:
No comments:
Post a Comment