The Tax “Chicken Or The Egg” Conundrum

The 2010 election cycle brought many policy issues front and center for the American people.  Federal spending, federal debt, earmark spending, war, illegal immigration, and health care dominated the election landscape.  But a major policy issue that brought the Lame Duck congress into sharp contention was tax policy.

In the final several weeks of the 111th Congress, the President, having led the biggest political party implosion in 100 years, had no choice but to move to the center on tax policy.  The final decision to extend the tax cuts enacted by President Bush had Barack Obama and Bill Clinton publicly turning their backs on the much vaunted Clinton tax increases, supposedly responsible for a gazillion jobs created (or so they say) during the 1990’s.  Obama’s cheerleading about rolling back these cuts to the Clinton plan led his caucus to rally to his side before the election.  Their allegiance was so strong that they failed to even pass a budget for fiscal 2011.  Their loyalty was rewarded by the voters with a shellacking at the ballot box.

Well, it was a shellacking for 60+ House members and 7 Senators and hundreds of state general assembly members.  You see, Obama was not on the ballot.  Well, I mean, he was on the ballot but not up for re-election.  Having allowed the Democrat-controlled House to do his bidding, he watched them vaporized across the fruited plain.  And then, in typical politician fashion, he pivoted over their dead bodies to do what he told them he would never do.  So much for principle.  As for principle, little more can be said for the Republicans.

Our “chicken or the egg” tax situation confounds even the most informed citizen.  Do taxes have to be raised to pay for programs or do programs fill in the amounts of monies raised by taxes?  Perhaps a historical perspective will provide some enlightenment.

After the founding of the republic, revenues were raised by imposing tariffs on goods coming in from abroad.  Such was standard procedure for nations at the time.  For the next 120 years, we constructed roads, ports, fought wars against the Barbary Pirates, the British, the Mexicans, the Indigenous Peoples of North America, the Spanish, and against each other, built post offices, the Capitol, the White House, the Supreme Court, the Library of Congress, the Transcontinental Railroad, the Panama Canal, and instituted numerous national cemeteries under this funding mechanism.  Admittedly, there was an ebb and flow to the obtaining of funds during wartime, but the federal government functioned on the tariff system.

In 1913, the 16th Amendment to the Constitution blew away the Founders’ fundamental intent of limited federal government, opening Pandora’s Box with the institution of the federal income tax.  Billed at the time as only a 1% tax on the wealthiest Americans, the federal “camel’s nose” was now in the individual citizen’s income “tent”.  If the tax’s billing had been truthful, perhaps the American people could have been able to stomach it.  But, alas, this was not to be.

By the time Ronald Reagan became the 40th President, the highest income earners were paying almost 90% of their income in federal taxes.  The income tax started out as being “Progressive”.  That is, the rate of taxation on an individual increases as that person’s income increases.  This format is in opposition to “regressive” taxes where tax rates “punish” low earners.  The terminology is very important as the description assumes the policy legitimacy.  I am intrigued by Progressives’ claim that taxes “punish” citizens.

This tax policy has resulted in numerous Congresses outspending the ability of the American people to pay.  How have they been able to do this?  We have borrowed money from our citizens and foreign nations, piling up almost $14 trillion in debt.  We have put off the recognition of liabilities in the federal retirement system by keeping them “off-book” and invisible to most citizens.  (Corporations and States who copied the federal example of keeping these unfunded liabilities off-book are now insolvent and facing bankruptcy, unless you can convince the federal government to print money to bail you out.)  We have allowed the Federal Reserve to print dollars and push them into the system, thus devaluing our currency and creating worldwide concern in countries that base their economies on our Dollar.

In the words of Doctor Phil, “How’s that progressive tax thing workin’ out for you?”

The initial income tax levied on the rich made it through the difficult amendment process because most of the people voting on it were not rich.  You see, it’s easy to vote misery on the other guy.  Especially, rich guys.  The conventional thinking among many Americans is that the rich got their money illegally, are currently taking advantage of somebody or some group to get it, or just don’t deserve it.  This class-warfare works like a charm almost every time it is tried.   The media are delighted to continue spreading this class-warfare lie.

But the schmucks who went along with this in the second decade of the 20th century got boiled in their own jealousy.  They didn’t figure on having a depression that FDR would use to confiscate businesses and gather constituency groups into his voting bloc by giving them stuff paid for by the “rich”.  His reward?  Four terms.  They didn’t figure on Lyndon Johnson’s Great Society fighting poverty and providing health care for all elderly Americans.  The Democrats reward?  Theycontrolled the House for forty years.  In the succeeding fifty years, the federal government confiscated from American Producers and transferred $5 trillion to fight poverty.  During this time, the “rich” majically grew to include millions in the Middle Class and the income tax rates soared way over 1%.  See comment about Reagan above.

The maladies the great society claimed to “fix” are still with us in greater numbers.  The same taxpayers did not count on the Congress dipping into the Social Security Trust Fund (you know, the Lockbox) and spending the assets being set aside for the elderly to pay for more vote-buying programs.  We certainly did not count on the most Progressive (read Socialist) President in history pressing the spending accelerator to the floor without thought of where the gas was going to come from.  Currently, 40 cents of every dollar spent by the federal government is either borrowed or printed.  

Legislators have realized that they have placed themselves in a seemingly contradictory situation.  They want to keep buying those votes with federal “goodies”, but they realize they will have a revolt on their hands if they try to increase taxes on American Producers.  So, they borrow.  So, they print.  So, they kick the can down the road for someone else to worry about.

These same political Progressives rail against efforts to reform the tax code to a fairer, flatter structure, citing the same class attack argument used by the folks in the 1910’s.  It’s not “fair”.  What do they mean by “fair”?  Herein lies the crux of the matter.

Political Progressives assume that the Constitution was written to enforce equal economic outcomes.  This is the bottom line.  If there are people in our nation who inherit wealth, discover it, or work like dogs for generations to achieve it, they “owe” it to others who were not as “fortunate”.  With each passing decade, more “rights” are added to the initial three listed in the Declaration.  The plight of children is always brought to the forefront as the chief appeal for continuing to confiscate wealth from producers and transferring it to non-producers.  This red herring continues to be used because it continues to be successful. 

The right to life, liberty, and the pursuit of happiness has become the right to housing, health care, food, education, child care, etc.  And these do not include the rights of degrees.  Does food mean just the basic necessities?  Does it demand free access to jumbo shrimp and filet mignon?  Does the right to health care demand free access to all transplants, HIV treatment, and drug therapy?  Does the right to free education demand as many years as a student wishes to advance?  Does the right to free housing demand anywhere a person desires to live?  Taken to its logical conclusion, it involves all this if the producers can be forced to pay for it.  As long as the producers will tolerate it.  As long as the producers will pull the wagon full of freeloaders, the freeloaders will continue to increase in numbers. 

And so, the answer to our conundrum?   Federal “programs” drive the need for increased taxation and more progressive taxation.  The bad news is that there is never enough of other people’s money to buy all the votes Progressives want to buy.

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