Browsing the blog archives for May, 2010.

Debunking the Laffer Curve?

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This post was inspired by a caller on Thursday’s (5/20/10) Wilkow Majority who claimed that few economists accept the Laffer curve as valid. I hear this half truth from time to time, and it follows a left wing pattern of discrediting an idea by citing “experts” instead of developing a well crafted argument. Let’s go through the facts.

The Laffer curve illustrates what economists call taxable income elasticity, the idea that not all increases in the tax rate affect tax revenues in the same way. Tax rates of 0% and 100% generate no government revenues, so the key is to locate the point in between where increasing the rate becomes counterproductive, and NOT raise taxes beyond that point. If you’re not familiar with Laffer’s work, take a few minutes to visit the Heritage Foundation cite for a more detailed explanation and a picture of the curve:

http://www.heritage.org/Research/Reports/2004/06/The-Laffer-Curve-Past-Present-and-Future

Like supply and demand curves, the Laffer curve considers the relationship between two variables (that is, the influence of tax rate on tax revenue). The beauty of the curve is its simplicity, but it doesn’t consider other factors—wars, the price of oil, or developments in China, to name just a few—that also influence economic activity and ultimately tax revenue. The Laffer curve does not take into account the type of tax either, such as income, sales, or VAT. All tax hikes reduce personal or business activity to some degree, but some do more harm than others. Rudy Giuliani actually pointed this out in a 2008 presidential primary debate, but it went largely unnoticed.

Few economists question the basic premise of the curve. What some debate is the shape of the curve and our current position on it. Those who say they are “for the curve” believe we are at a point where increasing the tax rate will not significantly increase tax revenue. Those who are “against the curve” are really arguing that we are still at a point where tax increases will increase tax revenue with little or no lost economic activity.

Most liberals and economists are Keynesians (more or less) and discredit the curve because it challenges the role of government intervention in the economy in the first place. Some actually contend that if tax rates are hiked considerably, most people will work as hard or even harder to make up the difference, and government tax receipts will increase anyway.

The best economic case for the curve is historical evidence (especially the Reagan years), the current crisis in Europe where high taxes have reduced economic activity and government revenues, and human nature, as people tend to work more when they have more incentive to do so. The case against the curve cites the so-called Clinton budget surplus, but ignores changes in capital gains taxes and a massive artificial Internet stock bubble that sparked the economy for a short time before bursting.

Overall, the hard evidence suggests that Laffer has a point, but neither proving nor disproving the curve is possible anyway. The take home point is this: Beware of unintended consequences associated with tax hikes. The best way to deal with revenue shortfalls is to cut government spending.

In the end, I have found that most who attempt to debunk the Laffer curve seem to be less interested in economic reality and more interested in advancing a socialist worldview. When debating Keynesians on the curve, I am willing to assume that they are right to a point, for the sake of the argument. What if increasing the tax rate by 10% would increase tax revenues by 6% instead of the full 10%? That would still mean a 4% loss due to reduced economic activity. Do we really need to endure this economic pain just to finance more social programs and entitlements? At this point they usually digress to Marxists clichés about the rich not paying their fair share or the need for shared sacrifice. Even Obama admitted during the campaign that higher taxes that reduce revenues might be acceptable as a matter of fairness.

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de facto One-World Government

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Conspiracy theories about a one-world government have been around for decades. Years ago I thought they literally referred to a universal government like the United Nations, but with real authority that trumps that of duly-elected national leaders. What we’re experiencing now is a major shift in the same direction, but it’s much more subtle. There is no authoritative global legislative body, but our leaders—particularly Obama and the Europeans—are colluding to tax and spend for the supposed betterment of the world economy. I call it a de facto one-world government because the effect is much the same.

We’ve seen several clear examples of this in the last several months. If CO2 is heating up the planet, then it doesn’t make sense for one country to limit its emissions while another picks up the slack. A “unified response” to global warming is required. While a cap-and-trade scheme represents collective action that would ostensibly reduce carbon emissions, it would also limit economic growth and redistribute wealth from developed to undeveloped nations. Most proponents of cap-and-trade refuse to consider the strong arguments against significant anthropogenic global warming. For them, the real objective is a de facto one-world government.

We’ve also heard about the proposed global tax on banks to create a fund to finance future bailouts. We were told that all nations must participate, lest customers move their money to banks operating in nations where it is cheaper to do business. Even socialists recognize that taxes and regulations stifle economic activity, so nations must work in unison to ensure that nations with limited taxes and regulations aren’t allowed to benefit at the expense of those with more intrusive governments.

Now it’s Greece, where government debt and the welfare state have spiraled out of control. The IMF’s $140 billion bailout of the nation includes about $50 billion from U.S. taxpayers. That translates to somewhere around $500 per family, a lot more for many if you consider that half of U.S. tax filers don’t actually pay federal income taxes anyway. And this doesn’t include subsequent bailouts that will likely be needed to “stabilize” the region.

Countries often address insolvency problems in part by devaluing the currency. It’s not an attractive solution, but at least it confines much of the pain to the troubled nation. However, this is not an option for Greece because the nation does not control its own currency. Greece’s options are limited. Raise taxes and the slumping economy gets worse. Cut spending and the entitled class riots in the streets (Don’t think this can’t happen down the road in the U.S., but that’s another story).

Thanks to the European Union, Greece’s financial catastrophe is a collective problem. Because of the common currency, neighboring countries can’t afford to let Greece (or any other country in the EU) implode, so a bailout is required. A common currency formally links one country’s economic destiny to that of others in the group. Collective oversight (AKA, de facto one-world government) must be a part of the arrangement, and the strong and responsible will always end up paying for the weak and irresponsible. This is why we should never give serious consideration to a North American currency, much less a global one.

The marriage of capitalism and socialism in much of Europe has largely failed. Capitalism is the stronger partner but is constantly blamed for economic problems that can often be traced to government intervention. Socialism’s clear and only advantage is that it can generate fast revenue by taxing, borrowing, or devaluing the currency. Capitalism produces the only real wealth over the long term, but requires work, discipline, and the recognition that equal opportunity doesn’t necessarily translate into equal outcomes. It’s more polite to be a socialist, or at least argue for some sort of middle ground.

You don’t need to be a conspiracy theorist to see the trend. No global dictator has emerged, but we are really getting a steady, less tyrannical shift in the same direction. At stake are our liberties, our nation’s sovereignty, and the integrity of the Constitution.

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Illegal Immigration in Arizona

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Arizona is now attempting to do what the federal government has refused to do for decades, seal its southern border. President Obama has done nothing to engage the federal government is carrying out its Constitutional responsibility to provide border security, yet was among the first to criticize Arizona for trying to do the job on its own. Former President Clinton is even calling for more legal immigration (i.e., legalize the illegals) as a short term fix for the Ponzi scheme known as Social Security. Those who demand that illegal immigrants be treated as illegal are once again branded as racists.

Polls suggest that most Arizonans and other Americans seem to understand the issue, however. It’s about border security, the rule of law, and economics. Gang and drug activity among illegals is rampant. Our republic is threatened when outsiders are allowed to game our legal system. The long term financial cost when one considers net taxes, schools, healthcare, and other factors is in the trillions (admittedly this is hard to calculate with precision, but Robert Rector’s study is the best effort I’ve seen; go to http://www.heritage.org/Research/Reports/2006/05/Amnesty-and-Continued-Low-Skill-Immigration-Will-Substantially-Raise-Welfare-Costs-and-Poverty). Racial profiling is not the objective, but we can’t keep looking the other way.

The irony here is overwhelming. When a bomb was found in Time Square, some leftists—including New York Mayor Bloomberg—actually suggested that a deranged right-winger could be behind the plot. When Faisal Shahzad was apprehended and confessed, we were told that he probably acted alone; it just couldn’t be an orchestrated effort. The emerging facts tell a different story, pointing to another case of premeditated radical Muslim terror. Given the chronology of events over the past decade, this should have been the most likely scenario from the beginning, but it just didn’t fit the left’s narrative.

Meanwhile, protests in Arizona continue. Some protestors are violent, and many are not even US citizens. The Constitution’s first amendment guarantees the right to assemble peacefully and petition the government for a redress of grievances. Non-citizens have no such Constitutional protection and have no right to be here in the first place.

Even the NBA’s Phoenix Suns got into the act. The last time I checked, Hispanics have less than their “fair share” of multi-million dollar contracts in the league. They might not play as much basketball, but they are not “underrepresented” in Phoenix as paying fans.

Sooner or later, some nut with alleged ties to a tea party somewhere will do something stupid. When that happens, the mainstream media will brand all supporters of limited government as radical anarchists. Stereotyping Muslims and illegal immigrants won’t be tolerated, but blanket assessments of conservatives, especially white Christian southerners, will escalate.

Make no mistake, illegal immigration is a massive threat to individual liberty. Amnesty means more Americans who would be net recipients of government wealth redistribution (i.e., socialism) and would likely vote for even more. Few illegals seem to understand the concept of private property rights, and amnesty sends a message that the rule of law is negotiable. There must be no compromise here. Requiring illegals to learn English and pay a fine is not just unenforceable, it’s an affront to our sanctity as a nation.

This is not a racial issue. I don’t necessarily blame the illegals who cross the border looking for work. Washington refuses to secure our borders, and proper documentation is not even required for a driver’s license, health care, or access to taxpayer-supported public schools. They don’t respect our laws because we aren’t serious about enforcing them. If I were impoverished and unemployed, I’d want to come to the US as well. I can’t blame most of them. The problem is really on our end.

This shouldn’t be a political issue either. Ronald Reagan, a Republican, tried amnesty and it didn’t work, and a second attempt will fail miserably as well. Don’t be fooled by references to fines and the supposed return to “the back of the line.” Don’t succumb to the race accusations. There should be NO PATHWAY TO CITIZENSHIP for those in our country illegally.

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