Debunking Statist Arguments: Tax away Our Debt

I started this series of blog posts about a month ago when I wrote on the myth of how minimum wage laws help the poor.  This time, I’ll focus on an issue that is much more Myth Debunkedprevalent in today’s political climate: taxation.

Argument: We can tax ourselves out of debt!  If only the rich paid more then we could wipe away the trillions of debt and restore America fiscally!

Answer: You guessed it: False!  America does not have a revenue problem of any sort.  Rather, we have a spending problem — and a massive one at that.  I’ll use a metaphor that is akin to one that Peter Schiff often uses.  Imagine you walk by a drug addict on the street who is shooting up heroin.  He looks at you and asks, “I’m all out of heroin and I need more.  Can you give me some money?”  Hopefully, you would realize immediately that the true problem this man is experiencing is not that he lacks a sufficient amount of drugs but instead is that he has a drug addiction.  In the same sense, America (Washington and those who support their policies) does not lack a sufficient amount of revenue, but instead suffers from a spending addiction problem.

Just look at the numbers and it will be apparent why tax increases cannot fix our fiscal mess.  Since the 1950s, annual federal revenue has averaged 17.8% of GDP and the CBO (although I warn against relying too heavily on the CBO) is projecting that it will average 19.3% in the future.  This is pretty much the range we can expect regardless of how high taxes are hiked.  Indeed, “since 1950, revenue from all sources has averaged around 18 percent of Gross Domestic Product, despite top tax rates that have fluctuated from over 90 percent to the high 20-percent range. Regardless of all efforts to jack up revenue (or reduce it), that’s what the government can expect to work with.”

The problem is that our spending is rising at a rate that tax increases simply won’t be able to keep up with.  Once again, the CBO is projecting that the federal government is going to be spending a ridiculous 23.3% of GDP, as a yearly average, in the next ten years.  More than likely, this is a conservative estimate.  The increase is partially due to entitlement programs that are “mandatory” such as Social Security, Medicare, and Medicaid.  Obviously it can be seen that, as a percentage of GDP, our revenues will never reach the projected spending of our federal government.

In addition to this, taxation remains–in effect–behavior maniuplation.  When you tax something, behavior is changed.  For instance, taxing alcohol and cigarettes usually does curb demand to some extent.  If we accept this to be true then one can observe that taxing income changes the spending, investment, and saving habits of individuals.  To be sure, this will have an adverse impact on our economy and further hurt our progress toward paying off the national debt.

Still, the argument is made over and over again that taxes can save us from this fiscal mess.  Who is going to pay these taxes, though?  Certainly not the poor or middle class.  How about, ohhhh I don’t know, evil corporations?  Yet should it be well-known by now that corporations are simply composed of people and have no real ability to pay taxes.  People pay taxes, not corporations.  So, when corporations (people) are taxed and capital is taken from them, it results in lower wagers, higher prices, or less for shareholders.  As one writer puts it, “A corporate tax is either a tax on shareholders of the firm, customers of the firm, or employees of the firm.”  It is never on the “corporation,” which is an abstract entity.

Maybe the rich can pay more!  Although, come to think of it, they already pay a large share of the income tax.  In fact, the top 1% paid 38% of federal income taxes and the top 10% paid almost 70% in 2008.  Still, they can afford more…right?  Watch the video below to see just how far taxing the rich can take us and after I hope it is clear as daylight that the sentiment “We can tax ourselves out of debt!” has been debunked.

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