The Tax Debate Is a Diversion
December 14, 2012
(This item originally appeared at Forbes.com on December 14, 2012.)
One thing that united both the Tea Party and Occupy Wall Street,
around 2009, was their opposition to corporatism/crony capitalism.
Someone had committed some very big crimes, and they were getting
away with it. Immense sums were being stolen from taxpayers, mostly
by big banks, around the world. Companies that should have gone bust
instead were bailed out and became even more dominant. Politicians
were bought and paid for by Big Business – not all big businesses,
but a relatively small group of companies whose names we all know
This issue has strangely disappeared from official discussion. Now
we are told that the Tea Party wants lower taxes (or at least no
change in taxes), and Occupy Wall Street wants higher taxes.
Divide and conquer.
This is not to suggest that tax policy doesn’t matter. It is one of
the most important things for the long-run (and often short-run)
success of any country. However, none of the events of 2008-present
have anything to do with tax policy – not even the budget deficit.
Federal tax revenues were 18.5% of GDP in 2007, about their
long-term historical average since 1950, and more than the 17.6% of
2002 or even the 18.0% of pre-Reagan 1978. Since then, tax revenues
dipped to 15.4% in 2011, but that has more to do with the sluggish
economy than any changes in tax policy.
Occupy Wall Street was diverted by the idea that this small group of
corporate criminals – among a much larger group of honest
businessmen – were “the rich,” and that they should be punished not
by the capitalist outcome of having their companies go bankrupt and
then doing jail time for crimes committed, but rather with higher
taxes on higher incomes. “The rich” were expanded to include anyone
who committed the crime of making more than $250,000 per year, often
between two earners. That’s why “taxing the rich” is non-negotiable
among Democrats, whatever the economic consequences, and however
irrelevant the additional income would be, if it even appeared at
This was a nice trick. Faced with this, the Tea Party types were
diverted into arguing that taxes on “the rich” should not be
This whole process was intensified by the fact that the U.S. Federal
deficit was indeed growing quite large, although not because of
insufficient taxation. Mostly, it has been a combination of falling
tax revenues (as a percent of GDP) due to economic stagnation, and
rising welfare and entitlement payouts for existing programs. A
couple wars didn’t help.
The Tea Party types were diverted still further by the idea that the
liberals were “buying votes” with their welfare and entitlement
policies. However, except for Obamacare, which even the lefties
don’t seem particularly happy about, there haven’t been any new
welfare and entitlement policies. As far as the public is concerned,
they aren’t getting anything new at all. Nor have Republicans made
any real effort to undertake a major reform of existing programs.
Republican and Democrat policy on entitlements is basically the same
– do nothing – at least for the short term.
Thus, the debate became not only one about taxes, but vaguely about
welfare programs in general. These are genuine long-term issues, as
the U.S. government will have to deal soon with fiscal problems that
have been festering for decades.
This outcome simply shows that the political discussion can be
steered and guided relatively easily, and most people won’t even
notice. Unfortunately, it also suggests that nothing very good is
likely to come of the process. The manipulators themselves don’t
seem to have much of a plan, except to continue doing what has
worked so well thus far – milking the taxpayers for their benefit,
and maintaining or expanding their present parasitic strategy. This
simply makes fiscal problems worse, and, as it leads to higher
taxes, cripples the economy as well.
The most likely path ahead is that tax rates will rise somewhat; the
economy will worsen somewhat with a recession in 2013 and generally
poor results for the next decade; tax revenues will disappoint;
Federal spending will prove impossible to tame with existing
entitlement and welfare programs; very large deficits will continue;
the crony capitalists will become even more influential, to the
detriment of the general welfare; and the Federal Reserve will be
pressured to take up the slack, with unemployment and inflation
rates massaged as necessary to enable them to do so.
This is a path of ruin. The Federal Reserve has now committed itself
to $85 billion of outright monetization per month, which is a very
high rate. They say they have an exit plan, but that is likely to
prove quite difficult in practice.
In times like these, it is good to hold a positive vision of the
future. Remember the Magic
Formula: Low Taxes, Stable Money.