Today’s Stagflation and Taxing the Rich

Tax reform is on everyone’s lips these days and the more ideas I have while reading about it, the more I realize that many people before me have had similar, if not the exact same ideas, well before I came into the dialogue. The issue that the tax code needs to be reformed is not the issue, that is a matter of record; how do we reform it is the question?

The cited podcast below got me thinking about tax reform and the narrator has some excellent, commonsensical, arguments.  He states how people face trade offs when it comes to tax reform and how nobody is willing to budge on their tax exemptions that affect their bottom-line. It’s easy to be an arm-chair quarterback and say we need reform, but nobody is willing to forfeit convenient complexity for a simple tax code because of the years of exemptions and patch jobs that have been instated into the modern tax code.  Also, how abolishing the Internal Revenue Service is redundant because they only enforce the laws, they are past in the legislature and it is from there that reform must happen.

This got me thinking about the state of the economy in the late 1970s. I did not experience this economy, I was born in the 80s, but we seem to be repeating the same issues that Jimmy Carter had seen back then.  Slow economic growth, low participation rate, little to no incentive to go to work and an unsustainable entitlement program.  Jimmy Carter blamed the issues of the nation on the people in his speech in 1979 calling it a crisis of confidence and how the government cannot help, that change must come from the attitudes within the household… Thanks Carter… It wasn’t until Arthur Laffer theorized the Laffer curve (below) and convinced President Reagan several years later that lower taxes can create more tax revenue did the economy begin to improve.

Laffer’s curve shows that as tax rates go up, tax revenues will also go up; but there is a point of critical mass where it becomes counterproductive to raise taxes because it disincentivizes people to work because of the high income taxes.  The government must find a balance in order to maintain adequate taxation for social services and a growing economy.  Reagan lowered the tax rate from 70% to 32% and we’ve seen continual GDP growth ever since, until recently. It could be argued that we have raised taxes to or past the point of critical mass and are now disincentivizing people to work, or that we have created a generation of entitlement and social security and medicare benefits are simply too generous, writtled with fraud, and underfunded.

No matter how you slice it, we need social security and tax reform.  The participation rate is slowly falling and retirees are increasing.  2025 is the year the economists say is when we will no longer be able to pay entitlement benefits to those whom deserve it.  And yes, we have created a generation of entitlement, but that monster was born long before any Millenial.  We created a world better for our children, now they are the ones who have to figure out a way to pay for it.  We have been borrowing from future generations and stifling growth through debt since President Johnson and are past the point of no return with the deficit.  So now what? Everyone is screaming for reform but nobody wants to sacrifice services to pay for it.

Raise taxes on the wealthy… That’s rich.  The answer to irresponsible government spending is to take money from the people who aren’t irresponsible with their money.  Just because Warren Buffet has money doesn’t mean the government has the right to take it all to pay off bad debts, especially the bad debts caused by the student loan crisis. Our progressive tax system has already seen its consequences by encouraging corporate inversion, stifling tax loopholes, and the wealthy voting with their feet by moving to tax haven countries life Switzerland and Andorra.  I’m not saying the wealthy shouldn’t pay their fair share, we all should, I’m saying that we need to take a good look in the mirror about how we got ourselves into this mess before asking Mommy and Daddy to write a check or stealing money from their dresser like an adolescent.  If we want to be treated like adults then we need to start acting like adults.  It’s not a perfect system, but it’s the world we live in.

Supply side economics encourages economic wealth by eliminating barriers of entry for new competition and encouraging investment by not crowding out the economy.  It promotes earning a paycheck and not asking for handouts.  We definitely need a safety net system in place, automatic government transfers are one of the only reasons why didn’t fall into a full-blown depression in 2008; but why were we in that predicament in the first place? Because people are greedy and don’t want to work… so they steal money from the people who are best positioned to invest and increase aggregate demand.  Maybe, instead of taking Warren Buffet’s money and spending it willy-nilly, we should put a copy of the current budget in front of him and ask for advice.  The only way to get ourselves out of this mess is to make the difficult decisions when it comes to budget and tax reform while still maintaining an incentive for people to work; that’s tricky business, but we can take a page out of Laffer’s book to make progress.

Read about the economy and the way things are going, I implore you.  This is important and without everybody being educated on the issues we are doomed to repeat history.  Do not let another stagflation of the 1970’s happen today.

Thank you for your time.

Andrew Laffer still publishes from his firm in San Francisco, California: The Laffer Center

The Laffer Curve shows that Tax Increases are a bad idea

Bill Gale on taxes and the IRS– podcast

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