"Political Debate Centres on Taxation"
By Denis A. Kleinfeld, US Virgin Islands
Watching the Democratic and Republican conventions reveals a stark difference between the two parties’ view of taxation. From the Democratic position it appears that proposals for vast new spending projects will be paid for by increasing the taxes on the “rich”. The prospect of unlimited new entitlement programmes for the other masses of taxpayers all paid for by the “rich” class has a lot of populist appeal. On the Republican side, there are calls for lower taxes and reducing the size of government. Lost in all this, is the discussion of the difference between tax rates and tax revenue. Without question, whatever policy is proposed by those seeking higher office, the basic fact of life is that it will all cost trillions of dollars for government services that comes from tax revenues or borrowing.
Tax in Britain has reappeared as a hot political issue. For years, the British have seemingly accepted the fact that the amount of money taken by the government was about right. Prime Minister Gordon Brown’s “economic plan” rests on raising tax rates on high income earners to redistribute wealth to masses of lower income voters. The Prime Minister overlooks the fact that his current policies have resulted in Britain being in the worst economic shape it’s ever been in for the last 60 years.
The reality is that raising tax rates does not inevitably mean that there will be a rise in tax revenue. In fact, the opposite appears to be true. The Laffer Curve is an economic concept developed by Arthur Laffer in the 1980s. Essentially, it posits the argument that by lowering tax rates, the government may actually increase tax revenues. This has been dramatically demonstrated in the US by the President Kennedy tax rate cuts, the President Reagan tax rate cuts, and, lastly, President Bush’s tax rate cuts. Each time the rates were cut, the revenue of government went up quite substantially. Unfortunately, the other side of the budget equation – that being spending – is that Congress increased the rate of spending even more creating the deficit crisis that the United States finds itself in.
What is the likely natural consequence when the government is desperate for money? In this regard, I recall a wonderful lecture by Rowan Bosworth-Davies who quoted from the part of the Cambridge Ancient History about the decline of the Roman Empire. “Thus began the fierce endeavor of the state to squeeze the population to the last drop. Since economic resources fell short of what was needed, the strong fought to secure the chief share for themselves with a violence and unscrupulousness well in keeping with the origin of those in power and with a soldiery accustomed to plunder. The full rigor of the law was let loose on the population. Soldiers acted as bailiffs or wandered as secret police through the land. Those who suffered most, of course, were the property class. It was relatively easy to lay hands on the property, and in an emergency, they were the class from whom something could be extorted most frequently and quickly …”
Mr Bosworth-Davies pointed out that the near guaranteed certainty of an invincible empire collapsed into what we have come to call the “dark ages”. The citizens found themselves victims of a state-turned-predator, as the money required to sustain the normal structure of civic control ran out. It seems to me that contrary to numerous historians, the basic fact is that the Roman Empire collapsed because their tax revenues went down and their expanding spending bought them to economic, social and military ruin.
Are we finding ourselves in much the same situation? It would seem to be a possibility. The established political leadership in Congress, Parliament and some Presidential office seekers propose more and more ways for government to seize by way of taxing the property of productive citizens so that the politicians can redistribute wealth to voting masses who, in turn, keep them in power.
The United States, the United Kingdom and most other industrial nations have a vast infrastructure of laws that allow the government to confiscate and seize personal assets from the citizens. If one sits back and reflects on the big picture, it would seem that a question needs to be asked – that is, if a tax system requires this level of oppression to enforce it, would a rational person use this form of tax system in a 21st century economy?
We know now that the 21st century information age clearly has consequences for the ability of government to collect tax utilising the current income tax system. The maintenance of the status quo is becoming more difficult. Day by day, even hour by hour, the gap between the economy’s productivity and the government expenditure increases unrelentingly. In The Sovereign Individual written by James Dale Davidson and Lord William Rees-Mogg, the authors observe: “In the 20th century, advanced industrial nations have taken between thirty and sixty percent of the national income to finance the welfare state. Between disintermediation, jurisdictional and encryption problems of global computer networks, this capacity is now vanishing. The welfare state was already becoming burdensome in the early 1990s. By 2010 or thereabouts it will simply become unfinanceable as will all kinds of unfunded state pension…” It appears that the authors' observation, speculative when written, is seemingly coming to fruition.
The authors point out that at some time individuals will want to escape the increasingly predatory government. As the government gets desperate it will do everything it can to stop it. The survival of the welfare state and the power of the political establishment depend on the ability to keep extracting a huge fraction of money for redistribution from the smaller group of regular income earners to those masses now part of the entitlement industry. It is undeniable, as Mr Davidson and Lord Rees-Mogg point out, that the taxes imposed upon the most productive citizens are priced at super monopoly rates, hundreds or even thousands of times higher than the actual cost of the services the government provides in return.
We read in our newspapers or hear on the cable news shows, blogs or newsletter services that Congress and Parliament are hostile to anything that they view is “offshore”. They look at the offshore sector as the convenient scapegoat for their self-created domestic economic crisis. People and companies who try and avoid having their hard-earned wealth virtually confiscated by government is taken as proof that those earning the money are trying to take unfair advantage of all the benefits that they receive in their country.
The major claims of benefits that the government makes is not that there must be this transfer of wealth for entitlement needs, but because of the need to protect the citizens of the country from illegal activities and terrorism. While I don’t know that much about it, it has always seemed to me that when the government comes out with figures showing the amount of taxes which are being hidden offshore, that figure always seems close to the same amount the government projects as being related to the drug business. Obviously, no one knows how much tax is actually being lost or gained in the offshore world and certainly the value of the drug business on a worldwide basis is equally murky. However, the sources of drugs and the States that support terrorism are well known. Eliminating these is a matter of the government deciding to have the political will to go in and do what needs to be done against the sources of these terrible scourges. Using them as an excuse to garner information to collect tax does nothing to protect the world from drugs and terrorism.
Over the past 60 years in the United States, and since the second world war in Europe, governments have increasingly been expending money as transfer payments to fund newly found "needs" that they claim only the government could pay for. Vast amounts of money are also being spent in foreign aid to appease local special interest voting groups. Nothing of real value is obtained to benefit the overburdened taxpayers. With the United States now hitting a USD10 trillion on-budget deficit, tthe United States is starting to hit the economic wall. Simply put, the US is running out of an ability to raise revenue from taxpayers without completely destroying the internal economy and it is coming to the end of its rope for borrowing money from foreign sources.
It is clear that those who are part of the current Politically Correct Establishment simply do not realise the destructive crisis that comes from government not having enough money with which to meet self-created and politically motivated social and welfare demands. The fuel of politics is money. All of which comes from the productive sectors of the economy. The US and other industrial and globalised countries are clearly facing a tax crisis simply because there is no honest recognition of the impact on tax policy over the relationship between rates and revenues. How that crisis gets resolved over the next ten years will determine whether the United States will continue to grow as the world’s leading economic power or will, as the Roman Empire, decline and at some point be taken over by the Barbarians.
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