Friday, November 12, 2010

Obama’s Tax Fallacy III

WH Rubbish

More White House Rubbish

- by: Larry Walker, Jr. -

Does keeping the current tax rates in place constitute a tax cut? No. Only a reduction in current tax rates could be considered a tax cut. Keeping the current tax rates on one group, while raising tax rates on another, constitutes a net tax hike (i.e. 0 + 1 = 1). That’s just common sense. Let’s face the facts; there are really only five logical possibilities:

  1. Lower Tax Rates on Everyone = Tax Cut

  2. Raise Tax Rates on Everyone = Tax Hike

  3. Maintain Current Tax Rates on Some + Raise Tax Rates on Others = Net Tax Hike

  4. Maintain Current Tax Rates on Everyone = No Change

  5. Raise Tax Rates on Some + Cut Tax Rates on Others = It Depends*

Net Tax Hike

Let’s focus on number three, which seems to be Obama’s solution. To raise tax rates on a few is to raise them on everyone. For example, let’s say that we have a two-person society, of limited resources, composed of Joe the employee, and Joe the employer. If tax rates are left alone on Joe the employee and raised on Joe the employer what will happen? Joe the employer will either have to cut back on expenses, one of which is Joe the employee’s wages, or raise prices in order to maintain the status quo. Either reaction will curtail economic growth. This drag on the overall economy will decrease the amount of income earned, and the amount of taxes paid by both Joe’s. Of course there are other possibilities, one of which would be for Joe the employer to fire Joe the employee, and move his operations to another country, one that has lower wage demands, which leaves Joe the ex-employee totally dependent on the State. The point is that the imposition of a net tax hike will have negative consequences.

One Economy

While Obama has neatly dissected the American economy into classes based on annual income, our economy is actually one. There is no lower class, middle class or upper class America; there is just one United States of America. It doesn’t matter whether you are a doctor, lawyer, accountant, CEO, manager, teacher, or wage earner; we are all interconnected. We all rely on the products and services of one another. To increase tax rates on one is to raise them on all, to cut tax rates on one is to lower them on all.

Defining the Problem

Now, since Obama has come up with a solution, the question we need to ask ourselves is, what is the problem? Are we looking for a way to grow the economy and to create jobs? Or, are we looking for a way to reduce the federal budget deficit? If the goal were to grow the economy and create jobs, then the logical solution would be to implement across the board tax cuts. Under number five* (above); a tax cut would imply cutting taxes by more than they are raised; otherwise only number one will suffice.

However, if the objective is to reduce the federal budget deficit, then tax policy alone will not suffice. The reason that tax policy will not solve our budget woes is that our budgetary problem is comprised of two variables: revenues and expenditures. The main reason for the present imbalance is expenditures. In fiscal year 2010, the federal government spent around $1.6 trillion more than its revenues. So can this problem be solved through implementing a $1.6 trillion tax increase? Not hardly. We already know that drastic spending cuts are required.

It has already been proven time and again that the act of lowering tax rates has the effect of broadening the tax base and increasing revenues. It has also been proven repeatedly that increasing tax rates has the opposite effect. A recent example would be the NY cigarette tax. As the NY Post reported, “Sales of taxed cigarettes have plummeted a staggering 27 percent statewide since the highest cigarette tax in the nation took hold in July.” So did over a quarter of NY smokers quit smoking? Not exactly, they simply started buying cigarettes outside of the state. So the plan to increase revenues by raising cigarette taxes actually wound up creating a budget shortfall.

We already know that a tax increase will not spark economic growth or aid in job creation; only a tax cut will suffice. It is also clear that a tax increase won't solve the budget dilemma. So why is Obama stuck on number three? What problem is he trying to solve? There is only one logical possibility: wealth redistribution (i.e. class warfare). Is this really where we should be focused at this moment in time? I say no. To me this is just a bunch of rubbish (i.e. partisan trash talk).

Certainty

Lowering tax rates would begin a new era of growth, like I personally experienced between the years 2003 through 2006, while a tax hike will only cause further cutbacks. Maintaining current tax rates would have one benefit, and one alone: certainty. Small business owners, such as myself, are just not able to function under the present cloud of unusual uncertainty. My experience this year has been that where I should have concrete answers, I have none. Most of my advice, and all of my decisions regarding asset acquisitions are on the shelf. It’s probably too late to change anything for 2010, but there’s always next year. However, there won’t be any definite decisions until there is certainty. And for me, certainty means stability. In other words, a temporary fix or patch won’t cut it. I’m holding out for a clearly defined long-term plan, such as W’s 10-year tax plan.

If I have to endure any more partisan rubbish from the White House, I will explode. I don’t think I can bear listening to another two years of partisan campaign trash. One and done son. One and done. For God’s sake, repeal the AMT, and either cut tax rates now, or extend the current rates, and then work on the out-of-control spending problem next year. These are the only logical options.

Related: Obama's Tax Fallacy II and Obama's Tax Fallacy

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