An unknown wit once said: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury.” When it comes to voting ourselves goodies from the treasury, we Americans stand near the point of no return.
I’ve addressed this lopsided situation before in a post on war funding, but this is a much more general discussion.
The federal government levies taxes on some of us, and it sends handouts to some of us. Some Americans pay more in taxes than they receive in handouts. I’ll call them “givers.” Others receive more in handouts than they pay in taxes. I’ll call them “takers.”
The Tax Foundation studied taxes and handouts from 1994-2004 (see the FAQ), and came to some startling conclusions. Below you’ll see a diagram of their 2004 breakdown of dollars received in handouts per dollar taken in taxes. Pay special attention to the blue bars (the total handouts per dollar of taxes). Look at the bottom 3/5ths of our population. Those groups get more in handouts than they pay in taxes; they’re the takers. The top 2/5ths are paying more in taxes than they get in handouts; they’re the givers.
Since the American form of government (thankfully a representative republic, not a democracy) responds fairly quickly to the will of American voters, we have the ability to force our elected representatives to give us tax dollars as handouts. If our representatives refuse our demands for goodies, a majority of us can replace them with more pliable politicians.
So what happens when the takers outnumber the givers at the polls on Election Day? We hit the “tax tipping point.” Since everyone gets one vote (unless ACORN is involved) regardless of their tax-to-handout ratio, the takers force the government to soak the givers. Eventually, the givers get tired of being punished for their success. The result is predictable:
Calculating how far society’s top earners can be pushed before they stop (or cut back on) producing is difficult. But the incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on higher earners — at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.
The sequence is always the same. High-tax, big-spending policies force the economy to lose momentum. Then growth in government spending outstrips revenues. Fiscal and trade deficits soar. Public debt, excessive taxation and unemployment follow. The central bank tries to solve the problem by printing money. International competitiveness is lost and the currency depreciates. The system stagnates. And then a frightened electorate returns conservatives to power.
Barack Obama claims he’ll give a “tax cut” to 95% of Americans (for the sake of argument, let’s ignore the impossibility of doing that while also paying for his massive expansion in government spending). His magic “tax cut” for those who pay no income taxes is really a tax credit. That’s a handout to the takers, funded by higher taxes on the givers. The chart above will get more lopsided, with the blue bars on the right shrinking and the blue bars on the left growing.
America cannot keep confiscating more and more money from the givers and sending it to the takers. There’s no such thing as a free lunch. If you’re one of the givers creating jobs and capital, you’ll only tolerate punishment for so long before you take rational steps to reduce your vulnerability. You’ll start shifting your capital away from productive uses and into tax shelters dictated by loopholes in the law. You’ll cut costs by hiring fewer employees or getting rid of current employees. You might even decide to escape the punishment of the takers by closing down your business or moving it overseas to a country with friendlier tax policies.
Now multiply this scenario to include all of America’s private sector, and you’ll start to understand the inevitable result of a tax-and-spend policy like Barack Obama’s. He believes he can tax and spend his way to prosperity, but he can’t (or won’t) see that he’ll push our economy over the tax tipping point and into either a severe recession or an actual depression. Our current economic downturn is already worsening as Obama’s victory grows more probable, and one hundred top economists recently warned of the impending disaster of Obamanomics.
Barack Obama is more than Jimmy Carter on steroids. He’s about to repeat Herbert Hoover’s tragically foolish response to an economic downturn. If Obama wins this election, he will drive us into a Second Great Depression.