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Thursday, September 14, 2017

When It Comes to Reduced Taxation, the Numbers Always Add Up

Because the rich have money to lose they can take risks that the rest of us can’t, and the economy gains immeasurably.

Apple is the world’s most valuable company today, but in 1997 it nearly went bankrupt.  Thanks to a $150 million dollar investment care of Bill Gates, the late Steve Jobs was able to acquire the resources necessary to nurse Apple back to health.  Jobs, Apple and a world soon-to-be reliant on Apple’s products were all very lucky thanks to Gates’s wealth being so immense that he could risk an enormous sum on a formerly great company that many left for dead.  What’s important about Gates is that he had $150 million to lose.

Gates’s intrepid investment speaks to the crucial importance of the rich to economic progress.  Precisely because they’re rich, they have the means to invest differently than most of us do.  Apple was no sure thing back in 1997, and evidence supporting the previous claim is that it took an investment from the world’s richest man to save the company.

Millionaires Invest Their Money

Thank goodness for the rare individuals who can uniquely direct their wealth to companies running on fumes, but also to ideas with high potential that, by virtue of having high potential, also have strong odds of failure.  Because the rich have money to lose they can take risks that the rest of us can’t, and the economy gains immeasurably.

The Post was saved by billionaire Jeff Bezos, Carlos Slim saved the New York Times. The problem is that policy types from the left and right don’t necessarily see it that way.  Washington Post editorial board member Catherine Rampell sees it as unfortunate and irresponsible that President Trump “is hellbent on passing a massive tax cut for the rich.” And while Trump perhaps doesn’t know why such a tax reduction would be great, Rampell should.  Rampell as mentioned works for the Washington Post, and because she does is likely more aware than most of the modern difficulties experienced by the newspaper industry.  The Post was saved by billionaire Jeff Bezos, Carlos Slim saved the New York Times, and one can only hope that one or a few experimental billionaires will direct their untaxed wealth toward the Los Angeles Times.  If Rampell hasn’t picked up a copy of the latter recently, she would likely find doing so illuminating for a read of what was once the world’s most profitable newspaper revealing what the Post might have become absent Bezos.

Instead, Rampell oddly argues that Trump’s proposed tax cuts are problematic given her belief that “at some point the U.S. government will have to make good on its accumulating debts, through some combination of future tax hikes and spending cuts.” Rampell’s point seems to be that tax cuts now just mean future tax increases to pay for today’s alleged profligacy.  But why? How does Rampell know this? Will “bond vigilantes” holding dollar income streams that Treasuries represent force gargantuan tax hikes?  That seems to be House Speaker Paul Ryan’s view, and perhaps Rampell’s.  More and more a deficit hawk, Ryan wanted a longer-term debt-ceiling extension than desired by Trump for (among other things – please read on) “the credit markets’ sake.” Ok, but once again, why?

Credit Markets and Federal Spending

Seemingly missed by Rampell and Ryan is that the credit markets have no fear of federal deficits and Treasury debt.  Not a bit.  This isn’t to defend government spending or government debt as much as it’s to say that yields on U.S. Treasuries (and on debt for G-7 nations in general) have been steadily falling since the early 1980s.

As Duke University economics professor Richard Salsman revealed in his endlessly excellent 2017 history of government debt (The Political Economy of Public Debt), countries like the U.S. don’t have debt problems now, nor do market signals indicate that they will in the future.  While the average debt/GDP ratios of G-7 countries were 37.7 percent in 1980, the average interest rate on 10-year government bonds paid by those countries was 11.9 percent.  Fast forward to 2000 when the debt/GDP ratio for those same countries was 74.5 percent, the average rate was 5 percent.  In 2015, with the debt/GDP ratio having surged to 116 percent, the average 10-year government bond coupon was 1.3 percent.  While Rampell and Ryan surely know public policy in ways that the average person does not, it’s not a criticism of either one to say they’re less familiar with the markets for government debt.  What they should know is that yields on Treasuries (the interest rate the federal government pays in order to borrow) signal what investors think of future U.S. creditworthiness.  That those yields have been plummeting for decades is a fairly strong communication from investors that the U.S. Treasury doesn’t have a looming revenue problem.

The markets for Treasuries aggregate voluminous information, and yields have long indicated that future economic growth will be extraordinary such that Treasury’s ability to pay back monies borrowed will be rather simple.  The deficits that Rampell and Ryan express worry over plainly don’t worry investors with a lot more to lose than the pundit and politician, and who are operating within the deepest, most informed market in the world.

There’s never enough wealth necessary to fund all the high potential/high risk experiments out there. But there’s still the major problem of federal spending, spending that Ryan would have in fairness liked to negotiate to a lower level had the allegedly expert negotiator in Trump not cut off the debt-ceiling negotiations without getting anything in return.  Though low Treasury yields strongly indicate that Treasury has the ability to borrow in size fashion, no reasonable person would say the latter is a good thing.  Going back to Microsoft’s saving of Apple, and Jeff Bezos’s purchase of Rampell’s Washington Post, there’s never enough wealth necessary to fund all the high potential/high risk experiments out there, or fixes of the formerly great that lower taxes on those with means would at least enable.  Which raises a basic question: what have we lost over the years, what never recovered or never saw the light of day thanks to this odd agreement among left and right that the rich in particular require higher and more confiscatory rates of taxation?  How extraordinarily odd it is that the accepted wisdom among economists, politicians and pundits is to tax at the highest rates those with greatest ability to invest in the companies of yesterday, today and tomorrow. Aren’t politicians in particular always talking about prosperity and “job creation”? Why then penalize those with the greatest means (no other economic class comes anywhere close) to make both a reality?

The Seen and the Unseen

Indeed, we must always consider the unseen; as in the companies that would have been revived and the companies that would have been started had government been taxing and spending much less.  Would the Los Angeles Times have already been saved, or perhaps the Washington Times bolstered as a more substantial form of competition for the Washington Post? Might a future Microsoft have secured the extra funding necessary to launch in “unicorn” fashion, or was there another hurtling-toward-bankruptcy company that had Apple-style potential to revive itself if the superrich were taxed less so that they would have more money to direct in intrepid fashion?

That’s where Rampell and Ryan disappoint the most.  Rampell laments proposed tax cuts that are “unfunded,” and Ryan, responding to Trump’s proposed 15% corporate tax, says that “At the end of the day we have to make these numbers work.” But once again, why?

Let’s never forget that the federal government, whether its numbers work such that the budget “balances,” or it’s in “deficit” such that Treasury must borrow, is not taxing or borrowing to stare lovingly at the dollars.  Not at all.  When the federal government takes in what we call money it’s arrogating to itself the right to plan where the economy’s resources – things like trucks, tractors, computers, desks, chairs, buildings, robots, people – are directed.  Rampell and Ryan are both wise people, they surely agree that the world’s 20th century experimentation with central planning failed in murderous fashion, so why is it so important to them that the latter be tried even a little, or a lot as evidenced by our $4 trillion federal government?

Regarding the revenue implications of tax cuts, who cares? This isn’t to say that the U.S. is Venezuela or that it’s on the path to a Venezuela-style existence.  That yields on Treasuries are so low is a certain sign that the U.S.’s economic future is very bright.  But we must once again always consider the unseen.  Imagine how much brighter the future would be if the federal government were consuming exponentially less of our wealth than it does now.  And it’s our wealth.  We know this, and so do Ryan and Rampell know this as evidenced by their intense desire to make sure the federal government’s tax numbers “work.”  The feds can only spend and pay off the debt insofar as we provide them with the means to do so through excessive taxation.  The spending, debt and obnoxious swagger of the federal government is ours.

So when it comes to tax cuts, as in reductions in the penalties placed on work and investment, the numbers always work.  They do because as free people we don’t owe it to the feds to fund their odd spending habits.  Tax cuts also always work because an economy is just individuals, and individuals are better able to prosper when governments are directing less in the way of economy’s resources.  What failed massively in the Soviet Union, China and countless other countries (and still fails in Cuba, North Korea and Venezuela) in the 20th century when governments arrogated to themselves near total control over the means of production, similarly fails when governments aim to control a smaller portion of the wealth we produce.

Regarding the revenue implications of tax cuts, who cares? As is investors are highly confident in Treasury’s creditworthiness, but even if not, that’s not our problem.  Deficits and surpluses are accounting, whereas the government spending that both represent involves waste of what is always and everywhere scarce, lays a wet blanket on economic growth, and signals a gradual erosion of our precious freedom.

Reprinted from Forbes

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.