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Thursday, November 9, 2017

An Extended Tax Reform Debate Will Subject Us to the Usual Absurdities

With the Republican tax reform bill in serious jeopardy, we can all look forward to the same old song-and-dance from politicians that basically amount to nothing.

John McCain’s confirmation he’d vote against the House tax reform bill as currently proposed means Republicans won’t be able to lower taxes – for some people – nearly as quickly as most of them want to. In all, three Republican senators have indicated their unwillingness to vote for the plan, meaning Republicans would need Democratic votes to get it through.

As Democratic support is unlikely, the American public will have to endure several weeks or months of grandstanding, proposed amendments, and further neutering of any real benefit to taxpayers. The worst thing about these rituals is they are always largely a debate over absurdities. Here are just a few of the perennial favorites.

Over Ten Years

All that really matters is what their proposals will do next year. Both sides of any tax and spending debate use the “over ten years” canard. Those politicians claiming their plan will “balance the budget” claim their bill will do so in ten years, always after increasing spending this year. Those opposing the same plan will pick out spending lines they don’t like, whether increases, decreases, or new spending, and use the ten-year canard to make the impact seem bigger than it is.

For example, if Republicans proposed cutting $100 billion from domestic spending (a mere 2.5% of the overall federal budget), Democrats would wail Republicans were depriving the public of $1 trillion of desperately needed services. Republicans would claim they were saving taxpayers $1 trillion. Neither side would acknowledge the $1 trillion is a rather small percentage of the ten-year federal budget.

In reality, Congress has no power to pass any bill that can’t be changed in as little as two years. Spending bills are debated every year. So, anything politicians say and the media parrot regarding a spending bill’s effects over the next ten years is largely hot air. All that really matters is what their proposals will do next year. And that news is virtually never good.

Revenue Neutral

Politicians are even brash or confused enough to sell a “revenue neutral” tax plan as a tax cut. Politicians will often proudly sell their tax plan as “revenue neutral.” This means the result will be the government collecting the same amount of money as it does under the existing tax plan. This is meant to preempt any criticism the plan will cause a rise in deficits. This one is absurd on several levels.

First, where is it written the government should always collect the same amount of revenue? No one ever proposes to freeze spending at the same level. That “baseline” spending will increase every year is such an ingrained assumption in Washington that even when a politician proposes a smaller increase in spending, it’s referred to as a “cut.” So, unless the politician is proposing the government spend the same or less money than it did the year before, a revenue-neutral tax plan would result in deficits.

Sometimes, politicians are even brash or confused enough to sell a “revenue neutral” tax plan as a tax cut. Obviously, this is absurd on its face. If the government collects roughly the same amount of revenue from roughly the same people, taxes haven’t been cut. They may have been collected differently, but they’ve remained the same. That provides a nice segue into yet another absurdity.

Percentage of GDP

Politicians love to defend the obscene increases in federal spending by reminding taxpayers federal spending has remained relatively the same for several decades as a percentage of GDP. But who ever said the federal government should siphon off a fixed percentage of GDP? The borders haven’t expanded in the past 58 years. Violent crime has plummeted in the past 20 years. Worker productivity has gone up, meaning the same number of people produce vastly more stuff than they did 20 or 30 years ago.

The percentage of GDP ruse attempts to convince the gullible the government isn’t growing. Since the Constitution hasn’t been amended to add new responsibilities, those factors should tend to lower federal spending as a percentage of GDP. Certainly, inflation caused by the government’s bank may put some upward pressure on spending, as may population growth. But neither of those remotely justifies the exponential growth of the federal budget over the past several decades.

The percentage of GDP canard is used to hide the three reasons federal spending continues to explode: entitlement programs whose costs were never adequately underwritten, Washington’s interventionist foreign policy of undeclared wars, and the proliferation of federal agencies, especially those, like Education and Agriculture, which largely redistribute wealth.

No reasonable interpretation of the Constitution authorizes any of the above, despite what the high priests in black robes may have written in any of their spectacularly illogical, spurious decisions. But the percentage of GDP ruse attempts to convince the gullible the government isn’t growing. Don’t believe it.

Deficits Mortgage Our Future

This one isn’t completely absurd, but it’s misleading. Politicians correctly point out deficits and the federal debt that results from them will have to be paid by future generations. We are “mortgaging our children’s and our grandchildren’s futures,” they will sanctimoniously thunder. That part is true.

The more the government borrows, the less economic growth there is. What’s misleading is the implication deficits only hurt future generations. That’s not true. They also hurt present taxpayers by crowding out productive, private debt. Remember, the way the government borrows money is by selling government bonds. The buyers of these bonds are generally investors looking for safer investments than stocks.

Bonds are considered safer because repayment with interest is legally guaranteed. Government bonds are considered safer than corporate bonds because the government can force its “customers” to pay more in taxes if it can’t raise enough money to meet its obligations. Corporations don’t have that luxury.

So, every government bond sold is a job-creating corporate bond that wasn’t sold. That means the more the government borrows, the less economic growth there is.

This all assumes legitimate buyers of government debt exist. Sometimes, the Federal Reserve buys the government bonds when there are no willing buyers in the private market. This is called “monetizing debt,” because the Fed usually creates new money to purchase the bonds. That leads to all the same ill effects as other types of monetary inflation, including higher prices for consumer goods, stocks, or real estate and malinvestment.

Fair Share

This come-on is traditionally associated with the Democratic Party, although the Republicans are selling a version of it this year to pay for their spending increases. The problem, say politicians, isn’t the obscene size of the federal government, but that some people just aren’t paying their fair share of taxes. In the past, Democrats leveled this fraudulent charge on “the rich.” This year, Republicans are leveling it on states with high taxes.

Neither of these allegations is remotely true. Like them or not, the richest Americans pay a disproportionately high percentage of federal taxes. The richest 20% of Americans pay 87% of all federal income taxes and 69% of all overall federal taxes. The bottom 45% of income earners pay no federal income tax and a tiny percentage of overall federal taxes.

Simply send each household a bill for $12,698.00 multiplied by the number of persons in the household. As far as high-tax states not paying their fair share in taxes because of the current state and local tax (SALT) deduction, Republicans argue this effectively shifts the burden of federal taxes onto states with lower state taxes, whose citizens can’t write off as much as their high tax state counterparts.

That’s a nice story and not completely illogical, all things being equal. But all things are not equal. First, it’s not as if any of the lower-tax states are foregoing federal benefits to coincide with their lower state taxes. None of the low-tax, net-tax consumer states have opted out of the Medicaid program, for example, even though every state is free to do so at any time. They simply go on consuming more federal tax revenue than they contribute.

One could just as easily argue high state taxes encourage federalism, meaning the provision of most government services by state governments instead of the federal government, a favorite rallying cry of Republicans when it’s convenient for them politically. In theory, providing more benefits at the state level, funded by higher state taxes, could shift some of the burden away from federal programs.

Whether that actually happens currently or not, the poster children for high tax states, New York, California, and Massachusetts, are all net federal taxpayers, meaning they pay more in taxes than they get back in federal benefits and services, even after taking SALT deductions. So, the Republicans’ fair share story isn’t any truer than the Democrats’.

There is only one way to truly ensure everyone pays their fair share of federal taxes in a country where all are supposedly equal under the law and benefit equally from the federal government’s “services.” Take the recently passed $4.2 trillion federal budget and divide it by 315 million citizens. That comes out to $12,698.00 per equally-benefitting person. Then, simply send each household a bill for $12,698.00 multiplied by the number of persons in the household.

After every family of four got its $51,000 bill for the government they voted for, one could, at last, expect to see some new faces in Washington very soon afterward. And net taxpayer individuals would never have to hear the words “fair share” again.

No matter how the charade turns out over the coming weeks and months, don’t be fooled by these perennial sophisms. The bottom line is the federal government is going to spend more next year than during any year in U.S. history. That means it’s either going to tax more, borrow more or both. Anything you’re told beyond that is just politicians blowing smoke and playing politics.