Bad economic policies can throw economies into downturns, and delay recoveries. Keynesian economics and rising effective tax rates produced four worsening inflation/recession cycles in and around the 1970s: 1969-1970, 1973-1974, 1979-1980, and 1982.

But Reaganomics was so successful that it all but abolished the business cycle for a generation. The economy took off at the end of 1982 on a 25-year economic boom interrupted by only two, short, shallow recessions in 1990-1991 and 2001. That is why today we no longer recognize the natural workings of the business cycle.

He makes a good point.  Several years ago, well before our current government-caused financial crisis, it dawned on me that I was incredibly lucky to have lived my entire adult life in such comfortable and successful times.  Most people have indeed forgotten that there is a natural business cycle.

The slow and weak recovery from the recession, which has lasted almost two years (a postwar record), shows yet again the failure of Keynesian economics, continuing a long, unbroken record of failure stretching back to the 1930s.

But the Obama Administration came into office knowing that the economy would ultimately recover as the business cycle turned up naturally, and planned to reap the political credit, enabling still greater leaps of neo-socialism. Internally, they are surprised and miffed that it has taken so long, not understanding that their own, blindly anti-market policies only delayed recovery.

Virtually every economic decision made by Mr. Obama since the start of his presidency has perplexed me.  Admittedly, by late 2008 it was obvious to me who this character was and I fully expected him to govern like a naïve leftist, at least initially.  But having witnessed a few of these cycles I also predicted that the self-preservation that often springs from plunging approval ratings would force some economic pragmatism reminiscent of Bill Clinton’s triangulations in the mid-nineties.  However, this President’s ideologically based proposals seem so clearly bad for the economic outlook that I am left with only two choices for explanations.  Either they really are that clueless about economics or their ideology simply trumps it.  Neither of those scenarios bode well for Americans, particularly the future generations about whom today’s liberals seem so coldly unconcerned.

Quoting Art Laffer (of Laffer Curve fame), the author makes the argument that 2010 will be the best economic year of President Obama’s reign.  First, there is a natural bounce-back that can be expected after this deep a fall.  Combined with the effects, albeit short term, of the massive monetary expansion by the Federal Reserve and an artificial heightened productivity resulting from an attempt to beat the tax increases of 2011 this should cause a bubble of growth in 2010.

But Laffer ominously continues that “when the U.S. economy comes to 2011, the train’s going to come off the tracks.”  He argues that the effect of the massive monetary expansion by the Fed will be “petering out” and points out that changes to tax policy are going to contribute to this economic stagnation and collapse:

“And we haven’t even begun to talk about the tax rate increases of 2011. These purely ideological abuses of economic policy will end up punishing working people nationwide. The top income tax rate is scheduled to increase by close to 20%, the capital gains tax rate by at least 33%, and the top dividends tax rate by 164%. Further tax increases in the pending health care legislation would raise these tax rates still more.”

The article’s author closes with this assessment:

Again, just the opposite of the long-term economic boom that followed the 1982 downturn when Reagan first slayed inflation, the flowering of growth in Obama’s second year will be followed by long-term stagnation and economic decline for America, slaying the American Dream, until President Obama’s neo-socialist economic policies are reversed.

I think that the writing is already on the wall for the November 2010 elections.  It will almost certainly be a disaster for the Democrats.  If Laffer’s dismal economic forecast is accurate, the 2012 elections could be an epic landslide reflecting an outright rejection of the American left’s love affair with Big Government Keynesianism.

Now enjoy this enjoyably funny video of “Keynes and Hayek” rapping about their conflicting economic theories.

Before we do go any further in this discussion, let’s define some terms.  Starting about the time that Mr. Obama spoke of “spreading the wealth,” his supporters both inside and outside of the media adopted an often successful tactic of responding to the socialist label with an always patronizing dismissal of the notion, going into a hair-splitting definition of the word in an attempt to obfuscate the larger point.  Therefore, since the use of the word socialism is so often met by an intentionally tangential debate about strict definitions, I find it useful to use another term in its place.  Let’s dispense with the debate about one particular flavor called socialism but instead focus on the umbrella philosophy of collectivism that also includes its cousins of Marxism, Maoism, communism, and fascism.  But exactly where is the line at which point the social contract of funding base common needs crosses over into collectivism?

I think that most reasonable people would agree that we need taxation at some level in order to be able to sustain a certain level of common government services and functions; the basic infrastructure that all of us use.  Things like the interstate system or the military come to mind, as well as more immediate examples like the police and firefighters.  I know that purist libertarians will say that even the roads should be privately built and maintained, though I was never able to go that far even back when I was an uppercase-L Libertarian, but let’s just accept that at some point there are legitimate roles for government and that those commonly useful actions must be funded in some way.

Income taxes

The basic idea of a straight (flat) income tax is to fund things in a way that hits the lower earning people a little more lightly than the higher-earning people, and most people seem to be okay with that, though I think that there are often some implicit assumptions in that thinking that often prove false, as I will discuss in a moment.  For our first example, if the income tax is a flat 15 percent, then the young person earning $20K/yr pays $3000 in income taxes and will likely receive a refund check if withholding is a part of the tax.  In that same 15 percent tax scenario, the builder who made $200K last year would pay $30,000 in income taxes and the CEO who made a million pays $150K in taxes.  It is the same percentage but obviously a higher dollar amount based upon higher earnings.  Here is where I would like to make one point that I think is often missed.  We are already crossing into collectivism here even though we are still discussing a straight, flat income tax.  Remember that when we talk of genuinely common things provided by government, things like the FAA/FBI/FCC/FDA/USDA/EPA/etc (it goes on forever), these things are being provided pretty much equally to each of our example taxpayers.  Yet when the young person pays a mere three grand for these common services while the builder and CEO pay 30K and 150K respectively, it already seems like this lower earner is getting a great deal to me.  As I hinted at above, I would speculate that a lot of taxpayers can accept this arrangement because they assume that the people getting the tax break are either young and just starting out (and likely to pay much more in taxes over their lifetime) or old and on a fixed income (having paid a lot of taxes already).  But I think that a lot of compassionate people would feel differently if they knew that in many cases the people were simply being subsidized by the rest of us for large parts of their entire lives.  I will not dwell on this point, but I do want to stress that even though a flat tax feels like a very fair model (and is infinitely more so than our current tax code) it already skews the bill-paying towards the more productive people in society who in most cases are not getting anything more for their money.

On that note, a friend of mine made an interesting devil’s-advocate counter argument that we should look at it more like insurance.  His analogy is that just like people purchasing insurance pay higher premiums for insured items of higher value, the higher earners have more possessions and more at stake, and therefore it would then make sense for them to pay higher taxes for all of this infrastructure and stability provided by the government.  However, even if you accept my friend’s position you have to admit that to a large extent the flat income tax already accomplishes that, as my example numbers demonstrated.  Moreover, you could easily argue that the higher funding requirements should only apply to funding those parts of government that directly protect our possessions, like the police and firefighters; I am hard pressed to see how wealthy Americans get more out of the interstate system or the FCC, for example.

That flat income tax approach, though it comes up from time to time during some political cycles, should not be confused with what we have in the United States.  In America we have what people like to call a progressive income tax, which means that the tax rate itself is increased based upon the amount of income.  [This gives me the opportunity to make the point that you should always be exceptionally wary when someone uses the self-congratulatory word ‘progressive’ as a complimentary adjective as their likely intended “progress” is toward a more collectivistic society]  Under this nice sounding tax (after all, who wants to be against progress?) the young person still pays 15 percent, or that same $3000, but the builder is in a higher tax bracket and pays 28 percent, or a much higher $56,000!  Furthermore, the CEO who under the flat tax paid $150K in taxes finds himself in the 31 percent tax bracket and now pays a whopping $310,000 in taxes.  Of course, Congress has added in a lot of deductions and loopholes and write-offs that allow people to end up paying a lower effective tax rate, but the point holds.  What the progressive income tax adds is something subtle and insidious; once you start adjusting the rates paid based upon income level you are starting to decide how much people need and should be allowed to keep.  That is a dangerous step that once crossed leads to a complete loss of any objective moral compass.

Four types of taxpayers

I would like to break Americans up into four groups based upon their role as taxpayers, as I think that it will help provide some clarity in discussing the truth about our system of taxation.

First, let’s start at the top.  The people who make the most money pay the most in taxes, and as I demonstrated above they are not getting any more services from the government in exchange for this significantly higher tax burden; these taxpayers are the Cash Cows.  Often denigrated and used in class warfare rhetoric, these people comprise the bulk of the investment class – the people who create jobs for the rest of the people.  While I do not want to limit the Cash Cow label to this highest group, it is repellant to me that the top one percent of earners in America pays over 40 percent of the federal income tax burden.  That is a higher share than is paid by the bottom 95 percent!  These people are often despised and envied, but they are a big part of the engine of our economy.

The Regular Joe Taxpayer is the person who is always a net taxpayer.  By my definition this is the bulk of what we would call the middle class.  The best way to look at these people is that they are paying their fair share of the tax burden, roughly paying into the system enough for their fair share of the common services.  Unlike the Cash Cows, these people are getting a fair shake in terms of their tax burden, but unlike the remaining two groups, they do not make other people subsidize their lifestyles.

The next group is comprised of people who are non-taxpayers.  At tax time their income gets offset by convoluted deductions and loopholes, and they end up with a net tax payment of zero, likely getting a refund of the overpaid income taxes withheld during the year.  However, to be in this group these people also must not live off of the rest of us via government redistribution programs.  Since they are getting all of the common services and infrastructure that the top two groups are funding they are rightly called the Free Ride group.

The last group is the Societal Parasites – these people are a big tick on the neck of productive America.  I can make the argument that they should lose the right to vote given that they will never vote for fiscal responsibility since they are not funding anything.

Even at this point, with our [allegedly] Progressive income tax, you could still argue that we have not taken a hard left onto Socialist Parkway, but we are surely slowing down with that left blinker flashing, particularly with a certain percentage of our people paying nothing into the system. However, we undeniably cross the line into socialistic when we set the system up with fake tax breaks and credits that end up with government checks going to people who pay zero in net income taxes.  This is not the typical (and all too often ignorantly happy) “I got money back” refund of overpaid withholding taxes with which most of us are familiar but instead a check with real dollars that was taken from some other taxpayer who had a better year than the person who used government to take another’s property.  Though arguments can be made that a “progressive” income tax is collectivistic in and of itself, once you start shifting money from one group to another you have undeniably crossed a line.  Redistribution of wealth is collectivism.  When one individual can use the government to take the property of another individual we have crossed a moral line after which there is no more moral compass.  The argument becomes one simply of degree.

According to the IRS’ own numbers, the bottom 50 percent of taxpayers pay only 3 percent of the income taxes, and the bottom 40 percent pays nothing – in fact they are actually paying a negative number as they are being paid for being unsuccessful.  How can a system where almost half of the people pay nothing towards the cost of things not be considered collectivist?  Note that this is well before one ever considers a new health care entitlement.

I think that it is worth noting that since it is completely based upon income, you can end up with people who have made a fortune and are now living off of it paying nothing into the system.  How much do George Soros or Ted Kennedy or some empty-headed Hollywood star care how much income taxes increase?  They are good to go, thank you very much.  It insults my intelligence when I see their constant attempts to take some high morals approach when they claim that they would be okay with paying higher taxes.

The Immorality of Collectivism

I mentioned earlier that I believe collectivism to be inherently immoral regardless of the results of an implementation of that system.  Churchill once said that “the inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery.”  In practice these results have proven to be true time and time again.  To Churchill’s first point, we will always have an unequal sharing of “blessings” when those blessings are based upon a free market meritocratic system, but we also always have incredible opportunity to better ourselves.  But Churchill’s second point properly points out that the results of socialism are better for a few people at the expense of everyone else.  In this sense collectivism is immoral because it turns the entire system upside down, structuring things to be best for and most conducive to the needs of the least productive, least successful, and all too often least ambitious among us.   Often lost in the debate is the sad fact that often the mere reality of government involvement results in a worse situation for all involved, including the unavoidable creation of less ambitious people with no incentive to work harder.

Socialism is immoral because at its core, once you strip away the camouflage of false compassion, it requires an acceptance that the government owns you, that when the rubber hits the road you are simply a number, and that if you are more productive than most other people you will be regarded as a cash cow to be milked for what some group of statists considers The Common Good.  You can dress that up in the “party dress” of alleged compassion but it remains un-American and immoral.

TAXATION

Eliminate the progressive income tax – replace it with a flat income tax or national sales tax – for its purpose is redistribute wealth, not fund the constitutionally legitimate functions of the federal government.

In other words, a flat tax or a national sales tax will clearly result in a more equitable sharing of the load in terms of the cost of common needs.  I must admit here that I do not believe that the wealthy get more out of government than the poor, and I could actually make the case that the opposite is true, so bearing that in mind I would define fair taxation as a situation where most taxpayers pay roughly similar dollar amounts into the system regardless of their income.  I submit that people should not get a free ride simply because they are unsuccessful, however I will not suggest that Levin agrees with that arguably extreme position.

A progressive income tax, however, completely parts ways with the fairy tale concept that we are simply all paying our fair share of the cost of common infrastructure and services provided by the government.  A progressive tax, meaning a tax where they decide how high a percentage to apply to you based upon how successful you are, is nothing more than an instrument for plunder.  Not surprisingly, Karl Marx called for the progressive income tax in his Communist Manifesto, the playbook of the Left.

As an aside, I always have to point out that whenever anyone uses the self-congratulatory label of “progressive” you can bet that they wish to progress towards more socialism and more control over your life.

All residents of the country must be required to pay the tax so they have a stake in limiting its abuse.

An oversimplified analogy: if you are not paying the bill at the restaurant you will not hesitate to order the lobster.  People who do not pay taxes have no interest whatsoever in controlling spending or growth of government and in fact often support the opposite, feeling that it will give them more opportunities to use the government to obtain the property of other, more successful people.

Eliminate the automatic withholding of taxes, for it conceals the extent to which the federal government is confiscating income from its citizens.

I have supported this for many years, going back to my most hard-core purist Libertarian days.  I have always been convinced that if April 15^th came along and everyone had to write a check for the astounding amount of money that the government was stealing from us we would have a revolution on April 16^th.  Withholding is just another way for the government to hide the amount of taxes that they are taking from you and you can see the ignorance it encourages when you hear someone who simply had too much withheld state “I did not have to pay this year, I got money back.”  Statist politicians just love morons like that.

Eliminate the corporate income tax, for it is nothing more than double taxation on shareholders and consumers, and penalizes wealth and job creation.

I agree wholeheartedly with Levin here; it is clearly double taxation.  Moreover, and this is what really irritates me, corporate income taxes are simply another way for them to hide the insatiable tax appetite of our out of control behemoth government.  If the government raises taxes on a corporation the company will simply (and intelligently) respond by adding the higher taxes into the price of their product or service, the result being that every single tax in America is paid by individuals.  Corporate income taxes succeed wonderfully at obfuscating that fact, often stoking some anti-corporate class warfare in the process.

Eliminate the death tax, for it denies citizens the right to confer the material value they have created during their lives to whomever they wish, including their family.

Let’s examine this.  A person works for their entire life, perhaps making wise investments and saving money, and at the time of their death they have some valuable assets.  Then in steps the government to take some more.  Lost in the debate is the cold hard fact that everything that they managed to invest or save is taken from the money that is left after the government has already taxed them.  There is no tax more immoral than the death tax.  It is an inherently evil wealth confiscation and redistribution program.

I had a very heated discussion with an acquaintance on this very subject.  He (pathetically) argued that the money belonged to the dead person, not the heirs, and that the government had every right to take all of it to redistribute to “the people”.  People who support the death tax are Marxists.  They simply do not believe in private property rights.  Most people who think like this are ambition-deficient losers, so it’s no surprise why they feel the way that they do.  They want your stuff.

All federal income tax increases will require a supermajority vote of three-fifths of congress.

I was very involved in the political debates of the 90s, when a previous seemingly hard-left President came into office, though in retrospect President Clinton was refreshingly reasonable and centrist compared to the statist juggernaut of the Obama administration.  But I digress.  One thing that I supported wholeheartedly during that time was the Republican attempt to pass a constitutional amendment to require a 60% supermajority vote in Congress to raise taxes.  It failed to pass (meaning that it failed to successfully be proposed to the states as an amendment) by one vote, with RINO Sen. Mark Hatfield (OR) voting against it after it passed overwhelmingly in the House.

The cynic in me knows that even had it passed they would just stick it to us with “fees” or some other intentionally misleading term, avoiding the “tax” label in order to avoid the supermajority requirement.

Limit federal spending each year to less than 20 percent of the gross domestic product.

I agree.  I would further argue that the amount of debt that the country holds should be limited to a hard percentage of the GDP.

We have a lot of work to do, my friends.  Get up every morning asking yourself if you want your kids to grow up in the America of Obama’s statist vision, then light a fire under your posterior to do something about it.