Recipe for Improving the Economy: Tax Cuts

If we are serious about taking action to improve the economy, then we need to be serious about tax cuts. Last week I posted about how the rich pay more than their fair share, and the worse off the top 20% is, the worse off everyone is. Thomas Sowell recently wrote a two part article called “The Invincible Lie” taking on the prevailing notion that tax increases lead to revenue increases.

(Thomas Sowell is a huge inspiration to me and one of my main influences. He is a brilliant economist, sociologist, and historian among other subjects. Click here to visit his website. Here are the full articles to which I refer in this post “The Invincible Lie” and “The Invincible Lie: Part II”)

Sowell starts off by pointing out that much of the Obama administration’s focus is on taxing the wealthiest Americans which they equate to taxing the highest income earners, but the two are not the same thing. Wealth is accumulated and many retired people have considerable wealth but not much income. Other young people in their thirties and forties may have considerable income, but have not accumulated any sort of wealth. So raising income taxes is not taxing the wealthiest Americans as Obama claims.

Furthermore, Sowell explains, raising taxes makes people act differently with their money. “A Democratic president — John F. Kennedy — stated the issue plainly. Under the existing tax rates, he explained, investors’ “efforts to avoid tax liabilities” made them put their money in tax shelters, because existing tax laws made “certain types of less productive activity more profitable than other more valuable undertakings” for the country.” In other words when you raise taxes on activities that help improve the economy, people will instead make money off of activities that do less to help the economy, but let them keep more of the money they earned. An example would be someone who goes over seas to invest money in foreign markets which tax the profits less, instead of investing in American enterprises which are taxed at a higher rate. This is just one way higher taxes can lead to less revenue and a worse economy.

In the second part of the article Sowell discusses the disservice to the audience perpetuated by most mainstream media. Apparently on CNN Gloria Borger asked in relation to extending the Bush tax cuts “Where are you going to get the money from?”. Sowell first points out that this is an extension of the old tax rate therefore there is no gap to make up. Secondly, she assumes that tax rates and tax revenues are automatically correlated.

As far back as the 1920s, a huge cut in the highest income tax rate — from 73 percent to 24 percent — led to a huge increase in the amount of tax revenue collected by the federal government. Why? Because investors took their money out of tax shelters, where they were earning very modest rates of return, and put their money into the productive economy, where they could earn higher rates of return, now that those returns were not so heavily taxed.

And in 2006 projected budget deficits were driven down sharply after the Bush tax cuts went into effect–a tax cut led to higher revenue. Sowell gives Borger the benefit of the doubt in that she may actually not know that higher taxes do not lead to higher revenues in all cases. However Sowell is much more critical of President Obama referring to a 2008 ABC interview in which Obama acknowledges that higher tax rates don’t lead to higher revenues, but still supported them in the name of “fairness”.

I would suggest reading both Thomas Sowell articles for yourself, but he concludes by saying “In other words, he [Obama] is lying when he talks as if tax rates and tax revenues move together. Ms. Borger and others in the media may or may not know that. So they are not necessarily lying. But they are failing to inform their audiences about the facts — and that allows Obama’s lies to stand.

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