National Economic Systems: An Introduction for Intelligent Beginners – 2

Part Two: Taxing the Rich.

I argue in Part One of this essay that the stimulus package could not possibly stimulate the economy the way a stimulus package is supposed to do. That is, the present stimulus package cannot shorten or lessen the current recession by stemming the growth of unemployment and by jump-starting the national economy, the way Keynesian economics has it. I suggested there had to be another agenda for this massive spending of public money.

Recessions – two consecutive quarters when the national economy contracts instead of expanding – are common under capitalism, in market economies. They wane, whether or not anyone does anything about them. This fact makes if difficult to assign credit to government measures designed to lessen or shorten recessions when economic indicators do look good. Economic indicators don’t look good right now, although some of the press is announcing the beginning of the beginning of the end of the recession.

At any rate, the recession will end eventually. That is, economic growth will resume. I would bet on it but I don’t know when. When growth resumes, we will be left with the second economic crisis facing us. That second crisis is less routine, more extraordinary, and more worrisome than the first crisis, the recession itself. It’s massive public indebtedness. I have to go into the reasons why the Federal Government is even able to incur massive debt.

We are speaking of course of the public debt, of the debt that everyone in America owns to some extent. It’s the same debt on which we pay interest through a portion of our taxes. The higher the debt, the greater the amount you have to pay in interest, just to service the debt. It’s like a credit card balance. (But don’t confuse it with your own, personal credit card debt. Your share of the public debt is in addition to, on top of your credit card balance.)

First, contrary to a perception widespread among liberals, the government does not have any money. The money it spends comes from our taxes, or it’s borrowed, or the government just prints it.

The most honest way for the government to obtain money, to raise revenue, is to tax people and businesses. Taxing is taking money by force, under threats of fines and eventually, of prison. Taxation is also the easiest way in America today to raise government revenue. That’s because almost half the population does not pay any federal income tax. It’s fairly easy to convince that half, plus a few romantically-inclined taxpayers, especially among the young. that the taxes on “the rich” can be increased without damage. In this view of the world, “the rich” is a subjective category encompassing everyone who earns significantly more money than I. For those pulling in $300,000 a year, the rich are those taking in a million dollars. For the coffee-shop waitress who clears $20,000 after taxes, the small merchant and his wife who earn $80,000 together are rich. That’s human nature I think. So, there seems to be an infinite supply of “rich” people to tax.

Governments however, including Left-leaning governments such as we have now in America, know better. Organizations and individuals and households respond to increased taxation. Responses range from concealing earnings to working less (producing less), to withdrawing from the world of production entirely.

Imagine a medical specialist in his fifties, in another country. He clears $200,000 per years and he has accumulated two million dollars in assets over his career. The doctor is taxed at the rate of 50%. After taxes, he has $100,000 to spend each year. That’s a good living everywhere except in a few major world cities. Now, his government, having deployed a large number of generous social programs to help the poor ans the struggling, finds itself in need of a lot of money. It raises the tax rate for the rich, including our doctor, to 80%. The doctor calculates that even if he manages to double what he clears from his practice, he will still not be able to come close to maintaining his previous lifestyle. (He will have only $80,000 instead of the previous $100,000.)

The doctor says, “Screw it. I will live off my savings.” He find an annuity that pays him 5% per year forever and moves to Tahiti. The economy has lost a high-value worker who may not be paying taxes ever again. Government revenues decline. All this is in addition to the fact that society at large has lost a valuable worker, someone who did something useful for others.

There is worse. The doctor who retires in his fifties would have worked many more years. He would have probably invested some of his relatively high earnings. Investment buys the tools for the production of tomorrow. This is not a slogan but a simple statement of fact. The poorer the tools, the less the earnings of the next generation, the less they are able to pay  taxes.

The political classes of all developed countries all know this scenario, more or less diffusely: Today’s taxation usually slows economic development tomorrow and it dries up taxation for the day after tomorrow. To make matters worse, today’s taxation fairly often results in a decrease in government revenue today. That’s because people are often very quick to respond to tax increases.

For all these reasons, contemporary governments tend to satisfy their need for money by borrowing instead of through immediate tax increases. Why they are able to borrow at all, and to borrow massive amounts, is an interesting story I will tell in a subsequent installment.

Technical note: Since I began posting this essay, I have heard several people – all young – tell me that they did not trust government figures, such as the unemployment rate, and GDP growth rates. I have to say the statement is the expression of a kind of naïve cynicism. Here is why: Common figures such as those two, are scrutinized daily, even by the hour, by thousands of pairs of trained eyes. The eyes belong to specialists located in the US and abroad, both. The fortunes, and even the daily bread, of many such specialists depends on their ability to get the numbers right. Training matters a great deal. If you look at GDP figures frequently, for instance, any anomaly jumps right into your face. (I can attest to this because I use to pore at such figures, in a previous life.) Even a number that merely fails to conform to expectations is thus perceived as an anomaly worth checking. The news of such anomalies travel instantly across the globe and questions are asked until the discrepancy is resolved.

When they wish to fudge, governments of all stripes do not cook well-known indicators. Instead, they rely on less well familiar, esoteric, measures hoping that the usual specialists will be too lazy to check the government’s interpretation. This ploy often works with the general media because they are lazy. It’s never successful with the likes of the Financial Times or the Wall Street Journal. But those have limited audiences and the news move fast.

Contrary to a popular saying, statistics do not “lie,” except to those who don’t know how to read them.

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