Wednesday, April 13, 2011

The Most Dangerous Part of President Obama's Debt Reduction Speech

He kept is short, to only a couple of lines, but it was the meat of his speech. The President wants to raise taxes. Oh yeah, you say, but that's only for the rich.

He did say that he wanted to limit itemized deductions for the top 2%, but that is not what I am referring to. What I was referring to is the President's statement that he wanted to make the income tax "fair and simple".

Whenever you hear the words "fair and simple" mentioned in conjunction with income taxes, think higher taxes, think shrinking pay checks. Every President runs the "fair and simple" scam to raise taxes. The Republicans' favorite president, Ronald Reagan, did so also.

Here's what economist Murray Rothbard had to say about President Reagan's proposal to make taxes "fair and simple":

The highly ballyhooed Tax "Reform" Act of 1986 was supposed to be economically healthy as well as "fair"; supposedly "revenue neutral," it was to bring us (a) simplicity, helping the public while making the lives of tax accountants and lawyers miserable; and (b) income tax cuts, especially in the higher income brackets and in everyone's marginal tax rates (that is, income tax rates on additional money you may earn); and offset only by plugging those infamous loopholes. The reality, of course, was very different, In the first place, the administration has succeeded in making the tax laws so complicated that even the IRS admittedly doesn't understand it, and tax accountants and lawyers will be kept puzzled and happy for years to come.

Secondly, while indeed income tax rates were cut in the higher brackets, many of the loophole plugs meant huge tax increases for people in the upper as well as middle income brackets. The point of the income tax, and particularly the marginal rate cuts, was the supply-sider objective of lowering taxes to stimulate savings and investment. But a National Bureau study by Hausman and Poterba on the Tax Reform Act shows that over 40% of the nation's taxpayers suffered a marginal tax increase (or at best, the same rate as before) and, of the majority that did enjoy marginal tax cuts, only 11% got reductions of 10% or more. In short, most of the tax reductions were negligible. Not only that; the Tax Reform Act, these authors reckoned, would lower savings and investment overall because of the huge increases in taxes on business and on capital gains. Moreover savings were also hurt by the tax law's removal of tax deductibility on contributions to IRAs.
As for the President's proposal to eliminate itemized deductions for the top 2%, here we have the problem of the President not understanding that it is the savings of the rich which cause the standard of living of a country to grow.

I don't think taxes should be raised on anyone, but the last people we should want taxes raised on are the rich. Their savings represent the next great developments in high technology, medical technology and the overall growth in America.

In short, the Presidents budget proposal at its core is a road to a declining standard of living and higher taxes, which will make the declining standard of living even more painful.


  1. Bob,

    You say: "I don't think taxes should be raised on anyone, but the last people we should want taxes raised on are the rich. Their savings represent the next great developments in high technology, medical technology and the overall growth in America."

    I ask you: Why exactly would the rich spend their money for the welfare of the overall public good? They had this money for so long and has it been promoting overall growth? Bankers taking record bonuses is not overall growth.

    How exactly do you deal with this level of high inequality in the society? There is no other choice but to tax the rich...I am not asking for increased tax rates for the rich, just make them pay a fair amount just like the middle class. Don't keep extending the Bush Tax cuts.

    When the market is not a true free market, when what is being practiced is rigged market capitalism, the only way to level the playing field at least to some extent - is to not provide extensive tax cuts for the top 0.1%.

  2. I too find problem with that comment Anon. While I think there should be no taxes on anyone, I doubt Lloyd Blankenfien and Hank Paulson are out there showering poor people with money and spending on "great medical developments". I'm a free market anarchist, and I have this warning: Praise the utlra rich with very great caution. There are few ultra rich in America who have not gotten there riches through the help of the US government. To those who make it through peaceful, non-governmental bullying means, those are the people who will innovate, create, and are the true heroes of the free market. Most CEOS, bankers, are not.

  3. I can't speak for Wenzel but the solution to the problem cited by both of the above posters is to end the crony capitalism, not tax the rich. Get to the root of the problem, in other words.

    It is the same thing with banking regulation in the aftermath of the financial crisis. The problems were caused by the Fed's credit expansion. Don't attack the symptoms. End the Fed!

  4. I second the words of Anon #3. Also, the first two posters should learn how rich people, out of their own self-interest, invest profits in their own businesses or other businesses and thereby increase prosperity for all.

  5. As a CPA that lived through the TRA-86 release, I had many very wealthy clients that experienced tax increases of going from an effective rate of 18% to upwards of 25% becuase of the closure of most loopholes (PAL rules). Those loopholes were usually tax shelters that would pay 20 to 1 losses based on building a building that no one wanted or wild cat drilling operations in cow pastures in the midwest. He also raised the capital gains tax to 28%. TRA-86 is probably the only legislation in the last 25 years that raised taxes on the wealthy (not to be confused with the mythical "rich" as the lying Dems like to define which is typically professionals and execs).

    On the flip side, ordinary income earners (usually not the wealthy) saw a huge drop in their effective tax rate. The group that probably saw the biggest decline and which also probably experienced the biggest income growth since then were professionals (ie, lawyers, accountants, engineers, executives). The highest tax you could face was a 33% marginal tax rate becuase of bracket phase out. Once you were beyond the phase out period your effective tax rate was 28%.

    The biggest mistake with Reagan's TRA-86 was that it change the distribution of the tax burden from the middle 40% to 75% to the top 10%. While progressives may hail this as a victory, the downside is that it has made the government highly dependent on the top 10% to not only make the same incomes year over year but to grow them as well. If Obama and the Dems get their way, with the new health care investment tax and a repeal of the Bush tax cuts, they will effectively shift most of the burden to the top 2%, which means we are effectively going from all of our eggs in one basket to our only egg in our only basket.

  6. I might be wrong, but I think he means that the "rich" purchase/invest in these things for their own benefit, and technology improves for everyone as a result. Like how they bought the precursors to cellphones and brought them up to the level we have today, which is one in which it is a common item as opposed to a luxury.