Sunday, December 05, 2010

Lame ducks should not let tax rates rise

Published in The Tennessean, Sunday, December 5, 2010

Lame ducks should not let tax rates rise

by Richard J. Grant

They say that a wounded animal is a dangerous animal. This would seem to apply also to a lame duck, as exemplified in our present lame-duck liberal Congress.

Despite the recent electoral repudiation of big-government liberalism, Democrats continue to grasp for any fin du rĂ©gime advantage that they might pull out in their last days as the majority. They continue to push the canard that their intended January tax-rate increases will affect only “the rich.” When they say “the rich” they really mean “high income earners,” but the needs of rabble-rousing demagogues will always trump language accuracy.

It is difficult to find real economists who would support tax-rate increases at a time of weak economic recovery and high unemployment. Even those economists who believe that such tax-rate increases might increase tax revenue will, nevertheless, recognize the danger of dampening growth at this time.

For those who put statist ideology ahead of the general welfare, none of this matters. They are holding hard to their story that it is only fair that the rich pay more and that the higher tax rates are needed to increase government revenue. And if wishes were horses, the statists’ dreams would come true. But they aren't and they won't.

The least-productive tax base is the one that is most likely to melt away under the glare of high tax rates. That is more likely to describe high income earners rather than low income earners. It is more likely to describe capital gains taxes rather than payroll taxes. The most productive and creative among us are also likely to be the most agile in the avoidance of tax burdens.

This is not to suggest that anyone can really escape the burden of high tax rates. The mere act of avoidance causes a shift of resources away from their most productive uses. The net aggregate effect is reduced incomes. Special deductions for politically favored interest groups will, of course, bring special advantages to some of those groups, but that cannot apply to the collective whole.

Whether “the rich” are defined as those earning over $250,000 or, as Sen. Charles Schumer is now desperately suggesting, $1 million, the biggest impact of these tax increases will be on Subchapter S corporations and other small businesses. The bottom line is that a tax on employers is ultimately a tax on employees, and on those who would like to be employees. What possible consolation could it give an unemployed worker to know that his former employer pays a higher tax rate than he does?

An increasing number of studies by economists find that government spending provides, at best, only a weak short-term stimulus effect. Whatever stimulus effect there is tends to wear off quickly and turn negative. Even such spending that is financed by deficits (i.e. increasing government debt) creates a need for present and future tax revenue. Whatever immediate stimulus we might get from consuming our “seed-corn” capital, when the effect of the tax burden is added in, the net result of these so-called stimulus programs is glaringly negative.

If Congress fails to extend the current tax rates in December, then all income-tax rates, as well as the rates on dividends, capital gains, and estates will rise in January. We need to get the lame-duck liberals behind us and give the capitalist pigs their wings.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean