1. The Most Fundamental Flaw Of Modern Liberalism:
The unquestioned (and erroneous) belief that govt can raise tax revenues through legislation. It cannot. I don't mean politically. I mean physically and mathematically, it cannot.
The unquestioned (and erroneous) belief that govt can raise tax revenues through legislation. It cannot. I don't mean politically. I mean physically and mathematically, it cannot.
2. It is this false belief which makes people like Chris Hayes (@chrislhayes) say things like:
I think a good answer for "How will you pay for your agenda?" is "We're a very rich country. We'll figure it out."
What they mean is govt can always raise more money through taxes.
I think a good answer for "How will you pay for your agenda?" is "We're a very rich country. We'll figure it out."
What they mean is govt can always raise more money through taxes.
3. Wrong! Govt cannot always raise more money through taxes. Not even if every member of Congress, the President, every judge in the country, every govt employee, and (what the heck!) every citizen in the U.S. is a liberal Democrat. Not even then.
4. You see, the govt can raise tax rates for sure. It can also levy sales taxes, user fees, and any other kind of tax or fee or duty or levy or penalty you can possibly imagine. And it can impose them all, one on top of the other.
5. But govt can do absolutely nothing to guarantee that even with all those measures the govt revenues will go up. Govt revenues are ultimately a function of economic activity, not a function of tax rates, etc. A 100% income tax rate on an income of zero produces no tax revenue.
6. So no matter how you slice it, the only -- let me repeat THE ONLY -- sustainable way to increase govt revenue to pay for any social programs at all, is by doing things that increase economic activity, i.e. grow the economy. This is an immutable law of economics.
7. And the only way to grow the economy is by doing things which incentivize people to increase their participation in value generating economic activities. If that takes lowering tax rates, you lower the tax rates. If that means eliminating unproductive regulation, you do that.
8. Also know that no matter whether you like it or hate it, in a growing economy, the rich will get richer, the poor will be better off, the middle class will flourish, but the income disparity between the highest earners and the lowest earners will most probably increase too.
9. Any coercive measures taken to enforce "fairness" just for the sake of "fairness" (as defined by politicians) WILL result in a decrease in productive economic activity, and hence shrink the overall economy and hence the govt revenue, no matter what you do with tax rates.
10/x. Railing against these inexorable laws of economics is no different from railing against gravity. Rail all you want. It won't change the laws of physics or economics. Better to understand them, make peace with them, and apply them judiciously. Envy and rage is not thinking.
Corollary#1: Whatever tax rates maximize the economic output of the nation also maximize the tax revenues. An increase in tax rates beyond that point hurts the economy and reduces tax revenues. It beggars everybody.
Corollary#2: Tax rate policy's sole purpose is, or should be, to maximize economic output (which automatically maximizes govt revenues also). It's a good tool for economic optimization. It is self-defeating if used for meting out social justice, howsoever defined.
Corollary#3: Govt's ability to raise revenue is not independent of how it spends the revenue it gets. The two are intricately linked. Every govt program needs to be evaluated not only in terms of its cost but, more importantly, how it impacts the economy, not just beneficiaries.
