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Raising taxes will do nothing good

Scrooge McDuckPeople respond to taxes.

That shouldn’t be a surprise to anyone, but to hear the Left’s explanations, the federal government can extract more and more money from their preferred targets without any repercussions. In Progressive Fantasyland, rich fat cat CEOs who run oil companies, banks, and Fox News have a secret stash of unlimited money hidden somewhere in their corporate jets or on the grounds of their posh estates, from which they simply pull more money after Washington takes what it wants. The government spreads the wealth around, the members of the middle class find excellent green jobs with full dental benefits, the poor all move up to the middle class, everyone votes for progressives, conservatives crawl back into the bowels of Hell from whence they came, and unicorns poop skittles to feed the hungry.

In the real world the vast majority of American wealth belongs to the middle class, but facts never get in the way of a juicy class warfare talking point. Here in flyover country where common sense still exists, we know that taxes influence people’s behavior. If the government collected no taxes whatsoever, then its revenue would be zero. Likewise, if the government taxed away every last cent people earn, revenue would also drop to zero. Nobody would have any incentive to conduct any economic activity at all, so there would be no wealth to tax. Somewhere in between no taxation and total taxation, there’s a point where the government will collect the maximum possible revenue. The conclusion isn’t magical, farcical, or deserving of ridicule. It’s common sense. It’s logical. It reflects reality.

It also means everything to your way of life, so pay attention.

Well-known supply side economist Arthur Laffer sketched out this thought experiment decades ago — reportedly on a napkin over drinks with conservative political heavy hitters — and came up with the curve that soon bore his name. Here’s a very simplified version of the Laffer Curve:

Laffer Curve

Economists argue back and forth in mind-numbing detail over the precise shape and dimensions of the curve, but the basic idea remains clear. Where the sweet spot actually sits is open to argument, but for reasons I’ll explain later I think it’s fair to describe the curve as skewed positively, with a tail extending rightward. The sweet spot would therefore sit closer to the left side of the chart than to the right. Here’s what it would look like on our simplified curve, with a nice little green dot:

Laffer Curve

If the government sets the tax rate higher or lower than the rate at the sweet spot, it won’t extract as much revenue from the private sector. Those two situations are represented below by the red and blue dots, respectively:

Laffer Curve

At the red dot, the private sector will devote a greater amount of its capital to tax shelters, accounting gimmicks, the black market, or simple inactivity while waiting for reasonable tax rates to come along. The government’s taxation will effectively punish people who engage in productive economic activity, and they will respond predictably by doing less. Why would you risk what money you have on a new business venture or investment if the fruit of your labor will be taken as soon as you earn it? Why would you work to improve or even just maintain your current business or investments? You will begin devoting too much effort to hanging onto what you have, not growing it. You’ll discover that hiding economic activity from the government becomes more and more rational as the government confiscates a greater chunk of your money. At extremely high tax rates, participating in the black market will become essential to your survival. As tax rates approach the maximum, revenue will crater because there’s less economic activity and more reason to cheat.

At the blue dot, tax revenue will be less than revenue at the sweet spot because the government will pass up opportunities to extract taxes that penalize economic activity only lightly. Setting the tax rate here isn’t automatically a Bad Thing™, unless maximizing tax revenue is the only goal. Other considerations apply, including Constitutional limits on government activity, the inherent wastefulness of government, the actual level of need (not desire) for government programs, moral objections to the size and scope of government, and changing political pressures on government’s size and activity.

Those are the basic principles of reality reflected in the Laffer Curve, but there’s more going on than simply trying to maximize tax revenue.

An oppressive government obsessed with high taxes will kill economic activity. To have tax revenue, you must first have economic activity. A government that makes few demands allows a market economy to flourish. When the government takes less and less wealth out of the economy, economic activity booms. Private sector economic activity feeds on itself; it’s not a zero-sum game. One man’s success and increased wealth do not automatically require that someone else’s wealth be taken away. In a wild-and-wooly free market completely unburdened by taxes, wealth creation happens at a blistering pace. Markets operate at high efficiency, competition keeps prices low, and people’s natural desire to provide for themselves keeps innovation and the capitalist work ethic high. The gaps between rich and poor may get bigger, but that’s not a Bad Thing™ in this situation because the rich get richer, the middle class gets richer, and the poor get richer too. Everyone benefits, and those with greater talent, motivation, work ethic, self-discipline, or some combination of the preceding traits benefit the most. Opportunity abounds.

This relationship between taxes and private sector economic activity looks something like this simplified curve:

The effect of taxes

This explains why the Laffer Curve is skewed. At low tax rates, the economy grows to such a size that the government’s smaller relative share is still big in absolute terms.

In many ways, you can think of government as a parasite on society. It doesn’t do anything efficiently, and feeds on the vitality of its host (us). A parasite weakens its host as it gets bigger and demands more sustenance, so if it isn’t careful it will suck its host dry and be forced to find another victim. In the wild, that’s an option. With our federal government, there’s no other host to suck on once the private sector dies.

freakish armsPerhaps a better metaphor describes the federal government as part of the body of America. Call it our arms, since the government’s only purpose is to exert force. The body needs arms to function properly, but if your arms grow so huge that they consume most of your energy, your heart and brain and other organs will suffer.

Now, we do need some government, even though it’s inherently wasteful and prone to corruption and oppression. A good limited government sets rules for fair play in the market, discourages monopolies, punishes dishonest business practices, limits pollution to reasonable levels, defends the country from foreign attack, preserves ordered liberty, and enforces contracts. Sadly, our government outgrew any rational size decades ago. America will soon have 250-pound arms attached to a 98-pound frame.

Washington’s spending addiction is like a malignant tumor on the country. Feeding it with more taxes would be incandescently stupid. Tax hikes won’t just suck more wealth out of the economy, kill more jobs, and encourage more spending. Tax hikes will actually decrease tax revenue. We’re in red dot territory and moving right. Raising taxes will hurt the economy, encourage harmful government spending, and it won’t even accomplish the stated goal of closing the deficit. Our problem is not a lack of revenue. Our problem is a combination of excessive spending, excessive and ridiculous regulation, and excessive taxation. Unless we slash all three, we are screwed.

The elected officials in the Republican Party haven’t exactly covered themselves in glory when it comes to spending and regulation, but the Democrats make them look like amateurs. Both parties have contributed to the problem, but the Democrats have moved beyond foolishness to suicidal insanity. They’ve raised the debt limit faster than ever, dragged the economy down deeper and for a longer time than any recession in living memory, and ruined several industries — housing, automobiles, health care, energy — through a combination of crushing over-regulation, massive bailouts that subsidized failure, and outright government takeovers. At least with the Republicans there’s some slim chance that they can be persuaded, goaded, or intimidated into doing the right thing. With the Democrats, it’s like trying to talk a suicide bomber out of his 72 virgins.

Raising taxes will destroy the economy and your way of life. This isn’t about coddling Scrooge McDuck. This isn’t about “fairness.” This is about survival. Don’t. Let. Washington. Raise. Taxes.

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