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Congressional Republicans and Democrats are
engaged in a heated debate over which Americans deserve not to have their
taxes raised, with both claiming that some form of tax cut will stimulate the
economy. The primary point of divergence is what type of cuts will be most
likely to get Americans spending, and whether the wealthy will wastefully
save their extra cash or use it to create jobs. This debate is
academic. If a stronger economy (rather than pre-election posturing) is really
the goal, then tax cuts alone will fail.
The real impediment to economic growth is not taxes, but the government
spending that makes high taxes necessary in the first place. Given the
widespread, but erroneous, belief that spending is the root cause of economic
growth (rather than saving and investment), it may shock many to know,
especially my fellow Republicans, that of all the three means to finance
government - taxation, borrowing, and money creation - taxation is the least
destructive over the long term.
I will discuss this topic in depth tonight on the debut broadcast of The Peter Schiff Show,
my new weekday radio show on WSTC in Norwalk, CT. Streamed over the Internet
from 6pm-8pm Eastern time, every weeknight at www.schiffradio.com.
Despite the visceral sting on April 15th, taxes have the virtue of being
honest, direct, and most importantly, visible. By transferring purchasing
power from one group to another, taxes take a pie that has already been baked
and change how it is sliced. But taxes do create dangerous disincentives if
they are abused. Raise taxes high enough and society's most productive
individuals may stop working; keep raising them, and the public may riot. As
a result, a government that relies primarily on taxes tends to be one that
lives within its means.
Government borrowing, in contrast, doesn't just move money around from one
spender to the next; rather, it taps into society's limited store of savings
and directs funds away from private investment and towards the public sector.
Decreases in the availability of private investment capital, which is where
economic growth really comes from, can be extremely destructive over time.
Borrowing also adds another cost that taxation doesn't: interest charges.
Just as it costs less to buy something with cash than it does to buy it on
credit, it costs society less to pay for its government upfront.
Printing is even more insidious. By creating money out of thin air,
government debases the currency, stealing from savers and depriving the
economy of a stable unit of account. The inflation that results from an
expanding money supply distorts all economic activity and discourages the
accumulation of future investment capital.
However, borrowing and printing have one huge advantage over taxation: they
make it much easier to disguise the true cost of government while
surreptitiously pushing the burden onto future generations. So while taxes
are political poison, borrowing and printing have always been preferred by
Washington.
Make no mistake, I am against raising taxes. I would prefer cuts in
government spending. Yet, after years of lowering taxes, with the illusory
hope that one day spending cuts would follow, I think it's time we tried
another tack. Instead of "starving" government, which has proven to
be a disaster, we should look to transfer more of the current cost of
government to taxation, which might finally create the political will to
actually cut spending.
To really make this strategy fly, we should revise our abominable tax code in
a way that is less destructive to the economy. In particular, taxes should
not: discourage hard work and risk taking, impede capital formation, impose
high costs for computation and enforcement, favor particular groups or
activities, or intrude on individual liberty any more than is absolutely
necessary. Given these preconditions, I believe a national sales tax would be
ideal. If Congress insists on taxing income, then a flat tax (whereby all
taxpayers pay the same rate with no special deductions or credits for
politically favored expenses) would be best. Unfortunately, we are stuck with
the most harmful system of all: a complex, progressive income tax, with lots
of politically motivated loopholes, deductions, and credits, that encourages
a raft of unproductive activities, and supports an entire class of unneeded
service providers to calculate.
By failing to address the spending side of the equation, neither the
Democrats' nor the Republicans' current proposals will provide any genuine
stimulus. The President's version will temporarily increase the purchasing
power of the middle class, but the gains will come at the price of larger
deficits, bringing larger tax increases down the road. By bringing down
savings, which President Obama ironically touts as
a benefit, the plan will diminish private investment, thereby slowing job
growth.
While the Republicans' distaste for high taxes is admirable, they fail to see
how increased borrowing or printing is worse. Unfortunately, after having
been in the majority for twelve years with nothing to show on the
cost-cutting side, those Republicans who do advocate for fiscal prudence have
little credibility with the voters. Without corresponding cuts in spending,
the full benefits of lower taxes - particularly as they apply to the rich -
will never be realized. In the current environment, extra savings accumulated
by the rich are largely "invested" in government securities rather
than private sector ventures. Throwing more money into a government abyss
can't help economic growth.
Rather than trying to disguise another misguided round of stimulus in the
cloak of a tax cut, we should deliver what the economy really needs -
genuinely smaller government. However, to accomplish this, we need leaders
who not only understand economics but have the political will to level with
the American people about how much government we can really afford.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in
depth analysis of the tenuous position of the American economy, the housing
and mortgage markets, and U.S. dollar denominated investments, read my new
book : The Little Book
of Bull Moves in Bear Markets" (Wiley, 2008).
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