2006/11/06

Tax, Lies, and Stock Market Tape!

As the mid-term elections close in on us with the Republicans looking vulnerable, they have fallen back on their tried and true propaganda campaign with one noticeable difference: the Democrats will raise your taxes and you will die because they want to be friends with the terrorists. Let’s leave the terrorist aspect aside, as it is so patently ridiculous, and focus more on the fiscal debate. The aforementioned noticeable difference in this years’ lie-fest is that the Dems were always referred to as the ‘tax and spenders’, but the spend part is conveniently missing. The Republicans or Conservatives as they like to pretend they are, were supposed to be the party that reigned in spending and promoted balanced budgets. Their Contract on America specifically called for balanced budgets. Casual defenders will say that since 9/11, we have to spend whatever it takes to protect ourselves, yet putting aside all of the Iraq war, Homeland Security, Social Security and Medicare spending, these Republicans make the Dems look like penny pinchers. John McCain compared their discretionary and earmark spending to a bunch of drunken sailors on leave. So they’ve proven they can’t control their spending, now let’s look at the tax question. As soon as Bush was appointed in 2000, he claimed that because of the surpluses, we needed tax cuts to give back to the American people, their hard earned money. Of course that meant a pittance of $300 to the middle-class and 80% of the benefits to the top 2% of wage earners. The next year we entered a short-lived recession, and lo and behold, the answer was more tax cuts. So for those of you keeping score: surpluses and strong economy = tax cuts for the rich, recessions and weak economy = tax cuts for the rich. See a pattern? Republicans always were for lower taxes, and it made sense at certain times, like when the tax rate on top earners was 70%+. At those high levels of taxation, there really might be a disincentive for capital investment, and the government did the right thing by lowering them to more reasonable levels in the 30-40% range. Then came Reagan and his supply-siders that claimed tax cuts would energize the economy and pay for themselves. That claim was controversial then, as Reagan’s presidential primary opponent George H. W. Bush called it "voodoo economics". The ‘Starve the Beast’ hypothesis came into fruition after the conservatives realized they didn’t want to promote spending cuts on pork, which legislators and voters liked, and claimed that tax cuts would shrink federal spending by starving it of resources, thus causing cuts in spending. Ever since, tax cutting has been the mantra of conservatism, but there have always been dissenting voices, some of the most prominent from within the conservative camp. One of those dissenters is William A. Niskanen, the chairman of the libertarian Cato Institute, who trained at the University of Chicago, and spent his formative years crunching numbers at the RAND Corporation and then in the Pentagon in the Nixon administration’s Office of Management and Budget. In the Reagan administration, he served as acting chairman of the Council of Economic Advisers. Niskanen recently analyzed data from 1981 to 2005 and performed a statistical regression that controlled for unemployment. He says there are "no signs that deficits have ever acted as a constraint on spending." "To the contrary: judging by the last twenty-five years, a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount. "

Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year),and not surprisingly, government spending has risen under Bush. "Conservatives who are serious about halting or reversing the Bush-era of big spending should stop defending Bush’s tax cuts. Instead, they should be talking about raising taxes to at least 19 percent of the GDP. Voters will not shrink Big Government until they feel the pinch of its true cost." said Niskanen. The most effective constraint of all is to raise taxes and cut spending, exactly the sort of anti-deficit package that anti-tax conservatives punished the first President Bush and President Clinton for approving, and exactly the sort of package that W. and his anti-tax allies oppose wholeheartedly. The conservatives are in no position to accept or even acknowledge those implications, now that tax cutting has become their only remaining sound bite. Therein lies the irony: by turning a small-government platform into an anti-tax platform, conservatism has effectively gone into business with the Big Government that it claims to oppose. It is not starving the beast. It is fueling the beast’s appetite. And the beast has a credit card, which future generations of kids will pay for. We hear all of the talk of the Dow Jones being at a record high, as an indicator of how well the economy is doing, and this is another charade that the media helps perpetuate. For those that don’t know, the Dow is made up of only 30 companies, while the much broader pictures of the stock market, the S&P 500 (500 companies), and the Nasdaq (3,000 companies) are still well off of their previous highs, especially the Nasdaq. I’m sure all of the families out there that are struggling to pay for school and braces and mortgages, are happy to hear that 30 big industrial companies and their executives are doing so well. Maybe they can get a job landscaping the estates of the CEO’s after they’ve outsourced all of the remaining U.S. jobs.