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The Tax Debate Is a Diversion

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Published : December 17th, 2012
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Category : Editorials

 

 

 

 

One thing that united both the Tea Party and Occupy Wall Street, around 2009, was their opposition to corporatism/crony capitalism. Someone had committed some very big crimes, and they were getting away with it. Immense sums were being stolen from taxpayers, mostly by big banks, around the world. Companies that should have gone bust instead were bailed out and became even more dominant. Politicians were bought and paid for by Big Business – not all big businesses, but a relatively small group of companies whose names we all know well.

This issue has strangely disappeared from official discussion. Now we are told that the Tea Party wants lower taxes (or at least no change in taxes), and Occupy Wall Street wants higher taxes.

Divide and conquer.

This is not to suggest that tax policy doesn’t matter. It is one of the most important things for the long-run (and often short-run) success of any country. However, none of the events of 2008-present have anything to do with tax policy – not even the budget deficit. Federal tax revenues were 18.5% of GDP in 2007, about their long-term historical average since 1950, and more than the 17.6% of 2002 or even the 18.0% of pre-Reagan 1978. Since then, tax revenues dipped to 15.4% in 2011, but that has more to do with the sluggish economy than any changes in tax policy.

Occupy Wall Street was diverted by the idea that this small group of corporate criminals – among a much larger group of honest businessmen – were “the rich,” and that they should be punished not by the capitalist outcome of having their companies go bankrupt and then doing jail time for crimes committed, but rather with higher taxes on higher incomes. “The rich” were expanded to include anyone who committed the crime of making more than $250,000 per year, often between two earners. That’s why “taxing the rich” is non-negotiable among Democrats, whatever the economic consequences, and however irrelevant the additional income would be, if it even appeared at all.

This was a nice trick. Faced with this, the Tea Party types were diverted into arguing that taxes on “the rich” should not be changed.

This whole process was intensified by the fact that the U.S. Federal deficit was indeed growing quite large, although not because of insufficient taxation. Mostly, it has been a combination of falling tax revenues (as a percent of GDP) due to economic stagnation, and rising welfare and entitlement payouts for existing programs. A couple wars didn’t help.

The Tea Party types were diverted still further by the idea that the liberals were “buying votes” with their welfare and entitlement policies. However, except for Obamacare, which even the lefties don’t seem particularly happy about, there haven’t been any new welfare and entitlement policies. As far as the public is concerned, they aren’t getting anything new at all. Nor have Republicans made any real effort to undertake a major reform of existing programs. Republican and Democrat policy on entitlements is basically the same – do nothing – at least for the short term.

Thus, the debate became not only one about taxes, but vaguely about welfare programs in general. These are genuine long-term issues, as the U.S. government will have to deal soon with fiscal problems that have been festering for decades.

This outcome simply shows that the political discussion can be steered and guided relatively easily, and most people won’t even notice. Unfortunately, it also suggests that nothing very good is likely to come of the process. The manipulators themselves don’t seem to have much of a plan, except to continue doing what has worked so well thus far – milking the taxpayers for their benefit, and maintaining or expanding their present parasitic strategy. This simply makes fiscal problems worse, and, as it leads to higher taxes, cripples the economy as well.

The most likely path ahead is that tax rates will rise somewhat; the economy will worsen somewhat with a recession in 2013 and generally poor results for the next decade; tax revenues will disappoint; Federal spending will prove impossible to tame with existing entitlement and welfare programs; very large deficits will continue; the crony capitalists will become even more influential, to the detriment of the general welfare; and the Federal Reserve will be pressured to take up the slack, with unemployment and inflation rates massaged as necessary to enable them to do so.

This is a path of ruin. The Federal Reserve has now committed itself to $85 billion of outright monetization per month, which is a very high rate. They say they have an exit plan, but that is likely to prove quite difficult in practice.

In times like these, it is good to hold a positive vision of the future.
Remember the Magic Formula: Low Taxes, Stable Money.

 

 

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Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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