The point of taxation should be to raise enough money for the basic functions of government, but not a cent more. That’s because the economy is the golden goose that lays eggs for all of us. We should not want to overwork the golden goose. Otherwise the goose might get sick and not be able to produce at maximum levels.
Then where would we be?
Indeed, the experience of governments and taxes has often been bad. Taxing too much or mindlessly can, and has, hurt job creation, driven businesses overseas, hurt savings rates—a vital element of prosperity—and wrecked economies as philosopher David Hume warned.
Does the average career American pol, looking toward the next election and with little time for Hume or any philosopher of liberty, understand or care about that? I wonder. Why?
The Career Pols Plague
Most of the American political class, a large and growing group of careerists, don’t think about long-term economic trends. They often spend more time thinking about the next election or what some called “the perpetual campaign.” The average career pol couldn’t imagine not being in politics. This contrasts with earlier periods in American history. Pols were often different.
That’s when men and women first accomplished something in the private section. Then, in a public spirit, they served a few terms in Congress or in a state legislature, but had no intention of spending the rest of their lives politicking and yakking it up with Fox or CNBC yahoos. Instead, they yearned like our American Cincinnatus, George Washington, to serve their time, make a difference and then return to the private sector before the average American became sick of looking at their mugs in the newspaper.
Today many of our pols get out of the university or a law school and hightail it into the cocoon of the public sector, making laws for us in the private sector. Many of them have almost no experience in the private sector.
That limits their ability to understand the people they are supposed to serve. The careerist politician has likely never met a payroll and never had to figure out how to build a business from nothing. Our pols, both left and right, are usually disconnected from the travails of the average Babbitts they are supposed to be “serving.”
For instance, here in the Rancid Apple the average George Washington Plunkitt has rarely ridden the wretched New York City subways, yet almost all pols lecture us on the selfishness of driving cars. He or she constantly talks about the virtues of public schools. But he often sends his kids to—–you guessed it—private schools.
Why my skepticism about the average politician who lives almost his or her entire life on the public payroll?
The Damage of Our Political Class
I see possibly the greatest damage they cause—-besides their aggressive foreign policies that often lead us into useless, ill-moral wars—is their flawed tax and spending policies. They not only punish hard work and thrift, but drive companies out of the country. They discourage would be capitalists from starting new businesses. These aborted businesses, these dreams that never became a reality, might have employed our sons or daughters or friends of ours who desperately need a job.
Two cases in point of the many misguided tax policies we have here in the United States. The American tax code—-which is a nightmare as most people on both the left and right now agree—-penalizes saving and actually leads many corporations to go overseas or head north.
In a story I recently did for the New York Post that examined the way our government taxes corporations, a political scientist, Elaine Kamarck, a former Clinton administration official, predicted that more and more companies would be leaving the United States if we don’t change the tax code, which is both cumbersome and incredibly pricey.
Too Pricey
Here in the US we have a ridiculous corporate tax rate of 35 percent. It is the highest of the major industrialized nations with whom we compete. “We are losing corporations and they are taking their jobs with them,” said Kamarck, who is a leader of Reforming America’s Taxes Equitably (RATE), a bi-partisan coalition to restore sanity to taxation.
The group is attempting to reform the tax code. One proposal would reduce the American corporate tax rate to 25 percent. That might stop or slow the number of companies that are moving to cheaper climes.
Let’s take Canada. It had a 21 percent corporate tax rate—-40 percent lower than ours. However, Canada has just lowered the rate even further (Canada, in recent years, has followed the same prosperous road as that used by the great German finance minister Ludwig Erhard, who repeatedly lowered taxes in the the 1950s, thus creating the German economic miracle).
Can one blame a Burger King for moving operations to Canada to get a cheaper rate?
If you answer yes, and you do blame these corporations for hitting the road, as does U.S. Rep. Joe Crowley (D- Queens, New York), please consider this: How different are your actions from some of your neighbors? How many people every year leave high tax states for low tax states such as Florida and Georgia?
Lo siento. No hablo el idoma
High taxes are even worse than that. How many American expatriates are living their retirement years in places such as Costa Rica, Mexico and Colombia? Many of these people don’t even speak Spanish or know the culture and customs of the country where they moved. Are these people, some of whom were your neighbors, friends and relatives, evil or unpatriotic because they desperately needed lower costs? I think not.
So why are we expected to criticize companies that seek low costs? Indeed, the latter is a big part of what this blog preaches: Don’t overpay for things; the savings from these economies can generate the money for the investments that can someday make you independent. And, if seeking savings is for you as it is for most people in these taxing times, buy good index funds. That’s because they are often the cheapest way to obtain the best long-term investments.
Another way that current tax code hurts people, and I am happy to say Ms. Kamarck seemed in agreement when I raised this issue, is the destructive way we tax savings and investments. These are critical production parts of our economy. Constantly we hear in the mainstream media about the importance of consumption. We never seem to hear about what justifies consumption: Production, namely saving and investment.
You Didn’t Earn That!
And, of course, the tax code treats savings and investment harshly. Just listen to the way this antiquated tax code, obviously influenced by John Maynard Keynes and Karl Marx, classifies the distributions we sometimes receive from savings and investments: They’re called “unearned” income. Excuse me? Unearned?
You earned dividends and capital gains by not consuming as much as you could have. Oh, and by the way, there’s no guarantee that markets will always go up and that you will earn any capital gains in any given year. You’re not given capital gains or dividends—-you earn them by picking the right investments, whose non-guaranteed gains make the economy stronger.
So the message of today’s terrible neo-Keynesian tax code is clear. You save and invest, we’ll tax you. You want to build up your corporation here, possibly add a new division or expand an existing one, we’ll charge you the highest taxes anywhere. You want a better life for your family and want to save, we’ll tax you a lot. Ergo, we have some of the lowest savings rates anywhere, with some quarters the savings rate of Americans actually going into negative territory.
(Compare this with our grandparents who, fighting their way out of the Great Depression—-pace John Kenneth Galbraith, a product of reckless Federal Reserve policies, which should be a warning for us today as Murray Rothbard warned in the book “America’s Great Depression”—-saved 40 percent or better a year of their incomes in the 1940s. That raised living standards. That set an example for the rest of the world. That led others, often in the East, to learn the lessons of thrift that many Americans have forgotten).
Saving Equals a Better Life
By the way, saving—although one would never guess so given the mainstream media’s almost constant harping on consumption—is actually a good thing for the economy. It is also a matter of how we perceive the world as the philosopher Immanuel Kant told us.
Increased savings expands the capital pool. When you have more of something the price of it comes down. When the price of money declines—-I mean actually declines and it hasn’t been reduced through the debasement of the currency through the legerdemain/easy money creation policies of the Fed—-then people can buy more of everything. But even if people don’t buy today or in the near term, their increased savings are a good thing. The reason why is what the Austrian economists called “time preference.”
Saving is really delayed consumption. Almost everyone saves and invests because—-tomorrow, next week or 20 years from now—they plan on improving their standard of living by spending more. That’s because they have accumulated a lot more and will—hopefully—be rewarded for their frugality. In the meantime, they hope to obtain the best rates for their investments.
However, tax them more or rig the game through artificially lowering the interest rates—as the Fed has been doing for years—and they’ll save less and less. Tax them more and they’ll invest less. However, do the reverse and they’ll save and invest more.
What do we want and what is the correct rate for taxing savings? The correct capital gains rate?
Before you answer consider this: Many baby boomers and others face personal crises over the next generation, a lot of them are falling behind. They risk an old age of poverty or a considerably lower standard of living than they enjoyed most of their lives.
Indeed, some 40 percent of boomers are at risk of running out of money in retirement, according to a recent Employee Benefit Research Institute poll. So what is the right savings tax number?
It’s a nice round one: Zero.
At zero our economy would boom as more Americans took advantage of the opportunity to get ahead without an obese government and its endless bureaucracies slowing them down with pesky taxes, ridiculous filing requirements and idiotic messages telling people to “spend more; it’s good for the economy.” Yes, spending can be good, but so is saving and investing. The latter, thanks to culture and destructive tax and central bank policies, is often forgotten. It is often demeaned by populist pols and through a mass culture that make savers seem like the apotheosis of selfishness and evil.
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So what is the correct corporate tax rate?
You can begin by dropping it to 25 percent. Then drop it more into the teens so American corporations can compete with countries with pro-growth policies such as Canada or the republic of Ireland.
That makes a lot more sense than some pol bloviating about “jobs, jobs, jobs,” while raising rates on the people who are the most likely to create jobs: Savers and investors—who create jobs indirectly but nevertheless do it— and the daring people who risk capital to start up businesses.
Economist Ludwig von Mises, in his opus “Human Action,” wrote higher living standards and the jobs we enjoy today are the result of savers and investors in the previous generation (Here’s yet another instance in which we can thank our fathers, mothers and grandparents. Gracias, padres, abuelos…).
We need to recreate or at least not hinder the spirit of enterprise that, in part, is fostered by an environment in which taxes don’t punish business. “The request of industry to government is as modest as that of Diogenes to Alexander: Get out of my light.”
Under this enlightened policy in which the sun is shining, the government, which learns to live within its means (O.K. now Dear Reader, you can wonder if I’ve popped open an extra large Colt 45 and have drained it in one giant gulp). In this scenario the government only takes what is necessary from the taxpayer, the saver, the investor and the entrepreneur, and not one centavo mas.
A leader in the movement to lower corporate rates, House Ways and Means Committee chairman Representative Dave Camp is not running for re-election. So therefore he might actually be telling us some hard truths that one rarely hears on the hustings. He warns Washington has failed this young generation because its tax policies have discouraged job creation.
“We’ve already lost a decade,” Camp says. “and before we lose a generation, Washington needs to wake up to this reality and start offering concrete solutions and debating real policies that strengthen the economy.”
Time to end the failed tax policies.
