However you come down on the matter, Mario Rizzo reminds us that higher taxes are already on the way.

Brooks does identify some real problems: for instance, that competition between the two major parties has become “fratricidal” and theatrical, and that it is creating massive budget deficits that, left unchecked, will prove catastrophic. But his diagnosis of the problem and his proposed solutions are fraught with fallacies.

He thinks that a revived patriotism will “lift people out of their partisan cliques,” yet the current partisan tribalism seems not to be lacking in patriotism. As is often the case, much hangs on how one understands the terms.

What makes a country great? One way to answer this involves claiming that there is something special about the ethnic makeup of the people who comprise it. For Mussolini there was something great, something special, about being Italian; his allies in Germany and Japan had similar theories about their respective nationalities. But that approach won’t quite work for America since it comprises people of many ethnicities.

Another way to understand national greatness is in terms of institutions and operating principles. But institutions and principles can change. What would make a country great on this model would be to have great institutions grounded in great principles. The Declaration of Independence is an example of this approach: Begin with a set of principles (moral equality of all persons, the natural right to live and be free, power only justified by consent) and then appeal to it when creating institutions (limited government of enumerated powers, republican structure with a democratic franchise, church-state separation, citizen militia, free trade). On this model America is great inasmuch as its institutions reflect its principles. A nation that claims to be dedicated to the principles outlined in the Declaration fails to be great when it invades foreign lands, abuses its citizens’ liberties, or forbids the free movement of people and goods.

Brooks’s exhortations reveal a lack of clarity about different senses of greatness, which comes out most clearly in his repeated use of false dichotomies. He asks, for example, “Do you really love your tax deduction more than America’s future greatness?” This alternative presupposes that it is only through higher taxes that a nation can become great. This in turn assumes that national greatness is only measured by things done by the government. What might these be? Scholarly, artistic, and technological greatness might well be better fostered by individuals having more money and freedom.

“Are you really unwilling,” he asks, “to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?” It’s not clear that solving other countries’ problems is how we measure our own greatness. In any event, this question also reveals a confusion: equating national greatness with government spending. Instead of asking whether Social Security payouts should rise with inflation, we might ask whether we would be better off as a nation of financially independent and responsible people who didn’t look to the political system for retirement income. Instead of wondering how high taxes have to be to fund overseas military campaigns, we might ask whether those campaigns need to be undertaken by the government (as opposed to either being undertaken by privateers or not at all). One way to measure American greatness might be the extent to which we exemplify peace and prosperity. The best way to achieve those ends would be to limit (or even better, eliminate) coercive interference with other people’s lives.

Lost Preeminence

Brooks laments a lost preeminence, but it isn’t clear what he means by that. He might be referring to a late-1940s preeminence, when America, having helped destroy the Nazis and their Japanese allies, led the way in rebuilding those nations and helping them become prosperous liberal democracies. But today’s “nation-building” looks very different. Unlike World War II, which actually ended, the current wars of nation-building seem perpetual, which suggests that a different course of action might have better results.

Or perhaps Brooks is referring to a time when American preeminence was measured in contrast to the privations of the old Soviet Union. In that case, let’s review the lessons of that contrast: Our former adversaries in the communist world were impoverished because tyranny doesn’t work as well as freedom. Besides the soul-crushing dehumanization of a system that doesn’t recognize fundamental liberties, the centrally planned socialist economic system turned out to be incapable of generating an abundance of goods and services. So if Brooks wants to see American preeminence regained, he might do better to promote liberalization of the world’s economic systems, which, again, is best done by example.

Brooks’s general rhetorical approach is to frame the debate between “liberals” and “conservatives” as a stubbornness game in which both sides must yield in order to bring about “a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.” As it happens, the free-enterprise system does precisely these things, but most politicians can’t understand that this requires not action on their part, but inaction. They must stop interfering with people’s lives, not look for new ways to do it; protect liberty not abridge it. Brooks fallaciously conflates subsidies with tax reductions, but this implies that people are not the owners of their property. If the government takes money from Peter and gives it to Paul, that’s a subsidy to Paul. But if the government takes less money from Peter, that’s not a subsidy to Peter, since it’s Peter’s property to begin with. Brooks’s calls to end subsidies are correct, but the word doesn’t mean what he thinks it does.

In a way, then, Brooks is right: America has lost some of its greatness and needs to take steps to regain it.

But the problem isn’t people who want to bring the troops home or keep more of their money. Indeed, bringing the troops home would make it easier for people to keep more of their money. So would ending drug prohibition. So would allowing free trade and free human migration. National greatness, American-style, does not consist of the storied pomp of ancient lands, but rather of the opportunities illuminated by the lamp of liberty.

Over many decades the total federal take from taxation has been quite steady: just under 20 percent of GDP. (It dips during recessions, of course.) This tells us that people — surprise! — adjust their behavior to the tax rates and as a result the haul stays about the same. So the fight over rates isn’t really about revenue or deficits. It’s a signaling game. One side signals it cares about fairness or fiscal discipline by calling for higher rates on the rich; the other signals it cares about economic growth or “the free market” by opposing higher rates. Either way, the government will take in about the same amount of money and the amount of resources appropriated and consumed by government (total spending) remains the same or grows. This is not to say that higher rates are harmless. The evasive action they stimulate is economically inefficient. For example, tax lawyers are paid big bucks to find ways around the taxes when that money could be producing something of value to consumers.

For all of this, I have one thing to say to all the enlightened and benevolent politicians, alive and dead, who worked so hard to give government an ever-greater role in our lives, never thinking of the consequences beyond the next election:

Thanks a lot and … well, never mind.

Barack Obama said those words in defense of his opposition to extending the soon-to-expire 2001 and 2003 tax-rate reductions for people making more than $200,000 a year. The government guesses that not extending them – that is, raising taxes — would bring in $700 billion over a decade.

Hard as I try, I can’t let this pass. As I’ve said recently, one need not feel all warm and fuzzy about the rich in a corporatist economy riddled with privilege to be bothered deeply by what Obama says.

Look at the statement closely. Now, if I may adapt what Mary McCarthy said about Lillian Hellman, every word Obama says is a fallacy, including “to” and “that.”

Let’s break it down.

If we were going to spend $700 billion… The “we” isn’t you and I. It’s him and his army of presumptuous bureaucrats. There is no collective decision being made by the nation. A group of identifiable individuals, ultimately backed by armed personnel, will decide how those resources will be used. How did they get those resources?

Imagine a mugger eyeing a potential victim, thinking, “I could spend that guy’s money by leaving it in his pocket, or I could spend it myself right away. Now which would be the better way to spend it?”

Any reasonable person sees what’s wrong. But change the context to government and politics, and all the rules are thought to change. Why is that? Because the government represents us? But it doesn’t really. (And if it did, how would that justify force?) The people who run the government say it represents us, but they don’t know what they’re saying. True, if enough people don’t like how the officials spend money, they may be voted out of office. But that doesn’t change the fact that while they are in office, they represent only themselves and their patrons. No “client” can fire them on the spot for misfeasance or malfeasance or even order them to stop, and they have myriad ways to disguise what they do. The principal-agent model breaks down. It is more designed to blunt criticism and immunize offenders. (I’ll save “tacit consent” for another occasion.)

The Wisdom of Power

…it seems it would be wiser having that $700 billion going to folks… Does it now? On what grounds are we to conclude that Barack Obama — or anyone else in political office — is qualified to say what a wiser use of such a sum of money would be? It’s hard enough deciding what’s a wise use of one’s own meager resources: The future is uncertain and the choices are many. It is the height of hubris – a pretense of knowledge, to use Hayek’s phrase – to invoke wisdom while asserting the power to dispose of that money.

… who would spend that money right away. There you go. He has a good reason after all. He’s says the money will go to people who will spend it in a hurry. Of course, he doesn’t actually know that. The money would just be distributed across the budget, funding the same old boondoggles or starting some new ones. Part of that $700 billion would surely go to military contractors to make something irrelevant to Americans’ welfare and inimical to the welfare of some non-Americans. We don’t know how quickly those recipients would spend the money. The wealthy executives of the contracting companies may be the same people who would have held on to the money if the tax-rate reductions were extended. A lot of it will go to government employees, who have higher wages than people in the private sector. This is one of those talking points that sounds as though it makes sense until you … think about it.

But let’s assume the people who get the money would spend it right away. Why is that better than simply letting the people who make the money keep it? The theory is that people making over $200,000 a year don’t spend enough of their incomes to stimulate the economy. So it’s Keynesianism that Obama is espousing here. Take the money from people who will sit on it, and stimulate the economy by spending it in ways – public works, for example — that will put it into the pockets of people who will go out and buy things. The shopkeepers who get it next will then spend it, and on and on. If you watch Chris Matthews, you’ll get as sophisticated a rendition of this theory as possible: The economy’s in a ditch. Consumer spending would get it out, but consumers are afraid to spend, so the government must spend for them. (The leading Progressive Keynesian, Paul Krugman, and the leading conservative Keynesian, Martin Feldstein, think it will take a major war to produce a big-enough stimulus. See my comment.)

Keynesian Fallacies

But Keynesianism gets it wrong on so many counts. The fundamental economic problem is not that aggregate demand is too low. Individuals are doing things – and not doing things – for particular reasons in response to what’s going on around them. Consumers are holding back because they’ve lost their jobs or fear they may do so. People are losing their jobs because a government-produced inflationary boom went bust and malinvestments need to be liquidated so resources can be realigned with consumer demand. But that’s not happening (fast enough) because unpredictability over what the government may do next and other factors make entrepreneurs and investors cautious.

All that Keynesians see are consumers not spending. They are uninterested in why. Once the reasons are understood, the remedy becomes clear. The burdens of government must be lifted quickly and people must be confident they will stay lifted. Then the necessary adjustments will be made — in part because people save (rather than consume) and invest, precisely what Obama seems worried about.

So let’s not raise tax rates – let’s cut or repeal taxes (and spending)! Obama’s “fears” are ungrounded. But give him credit: He combines bad economics and a shameful moral philosophy rather adeptly.

I laugh when I hear that question because it’s so obviously illogical. If the government were to cut taxes, say, by lowering rates or outright repeal, people would simply be free to hold on to money they otherwise would have sent to the IRS under threat of punishment. Allowing them to keep that money requires no expenditure. If the tax cut is dramatic enough, it might save money by permitting a shrinking of the government’s tax-collection machine. In the most basic sense, a tax cut costs nothing.

What people who ask that question really mean is: How will the revenue forgone be made up? Why do they care? Because they don’t want the government to have to cut spending.

Tax cuts don’t cost money; government programs do.

The demand that tax cuts be paid for rests on the claim that government distribution of other people’s resources – euphemistically called “spending” –  is sacrosanct. If you dare to propose that less money be sucked into the government’s coffers through one form of taxation, you’d darn well have a plan to make up that lost money because cutting spending is out of the question. That means raising other taxes to offset the cuts.

For those interested in freedom – which must include the freedom to keep the fruits of one’s own labor – that is hardly a satisfactory solution. Do I really care if I surrender my money through an income tax or a sales tax? It’s the demand that I surrender it at all that irritates me.

The question might be intended to point out that revenue shortfalls would have to be made up by borrowing unless other taxes were raised. Borrowing, however, is another form of taxation. Advocates of freedom should always bring the conversation back to spending. Give no aid or comfort to those seeking to raise revenue.

All Income to the State

This is important because when we talk the language of paying for tax cuts we adopt an outlook to which statists implicitly (and sometimes explicitly) subscribe, namely, the view that all income belongs to the State and that any measure that lets us keep some is just another form of spending. Tax credits and tax deductions are called “tax expenditures.” As C-SPAN explains, “Tax expenditures are losses to the U.S. treasury from granting certain deductions, exemptions, or credits to specific categories of taxpayers…. Tax expenditures are an alternative to direct government spending on policy programs.”

Or, to choose a less neutral source, the Center for American Progress says, “The government uses tax expenditures to accomplish the same goals as direct spending, but it transfers money by lowering taxes for an individual or company instead of giving them the money. Tax expenditures are, quite simply, spending programs implemented through the tax code.”

“Transfers money by lowering taxes.” You can’t make this stuff up.

From the conservative camp, we have Martin Feldstein writing in the Wall Street Journal: “These tax rules [intended to encourage certain activity] — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as ‘tax expenditures.’”

But government’s letting people keep their money is not really equivalent to its spending the money. If it were, the federal budget wouldn’t be $3 trillion-plus. It would be the whole GDP.

True, tax expenditures usually refer to deductions or credits for specific activities. But it’s a short step to believing that even general tax cuts to “stimulate the economy” are a form of government spending too. I imagine some people already believe that.

Of course, government regularly uses the tax code to encourage certain economic activity, such as buying a house or getting medical coverage through one’s employer. By implication it discourages alternative activity. And it’s true that tax credits and deductions can accomplish what a spending program might accomplish. Nevertheless, although manipulation of our lives through the tax code is objectionable, we shouldn’t conflate keeping one’s own money with government spending. That way confusion lies.

Advocates of liberty and autonomy naturally want government’s hands out of their pockets. No one should have to bow and scrape to keep a little more of what he or she rightfully earns. Tax gimmicks are sometimes tempting policies, such as a tax credit for hiring during a recession. But they help to reinforce the pernicious idea that our incomes are a tool of government economic policy.

Better to put our efforts into repealing and reducing taxes and spending wherever we can.

In its August 1 edition the editors of the Gray Lady published a lengthy editorial that claimed our economy is in trouble because tax rates are too low. That’s right, the “experts” at the Times say that what we need to bring our economy back into balance is a big increase in taxes. The editorial declares:

There is a lot of heated talk in Washington these days about the deficit, unfortunately little of it serious. Playing on Americans’ deep anxiety about the economy, Republican politicians have seized the deficit issue as their own — eagerly blaming the stimulus and even an extension of unemployment insurance for the problem — while denying their own culpability for helping dig this deep hole with years of irresponsible tax cuts.

Now, I heartily agree that the spending policies of the Bush years – including the trillion-dollar-invasions by our armed forces – were disastrous. However, they were disastrous because government lived beyond our means and the government now borrows endlessly — not because we don’t pay enough.

However, they don’t get it at the Times. Instead, we hear nonsense like this:

When it comes to controlling the near-term problem — trillion-dollar deficits every year for the next 10 years — the biggest help will be a return to solid economic growth and, with that, increasing tax revenues.

Growth will not be enough. There is no chance to put the budget on a sustainable path without significant tax increases, and not just on the wealthy. Few politicians, of either party, are willing to tell that truth.

It gets better:

Much of the deterioration resulted from huge Bush-era tax cuts, which left the nation chronically short of revenue, especially when it had to pay for two wars. And because the budget was already in bad shape when the financial crisis hit in late 2008, the necessary spending to rescue the system only deepened an already deep deficit. Unchastened, Republicans — joined by a few Democrats — are now determined to dig the hole even deeper by calling for all of the Bush tax cuts to be extended beyond their scheduled expiration at the end of this year.

What about the stimulus? The deficit has risen further under President Obama, to about $1.4 trillion this year, as the White House has tried to contain the recession it inherited.

The $862 billion economic stimulus, enacted by the Obama administration and Congress in 2009 along with subsequent aid, like extended jobless benefits, prevented a bad situation from becoming much worse, by supporting consumer demand at a time when private sector demand had collapsed. More help is needed. So far, stimulus accounts for an estimated 15 percent of the deficit in 2009, 28 percent in 2010 and 14 percent in 2011.  [Emphasis added.]

One hates to remind the editors of the Times that the nation is not the government. Furthermore, the “stimulus” did not prevent “a bad situation from becoming much worse.” It made things worse, much worse, because it kept the liquidation of many malinvestments from occurring while increasing the burden of government.

Unfortunately, the dinosaur known as the New York Times is clueless. On one hand, the editors realize we cannot sustain this national debt and budget deficits. On the other hand, they insist that government attempt both to stimulate the economy and raise taxes at the same time.

The government cannot tax and spend this economy into recovery, no matter what the Times editorialists imagine. No, we will have a recovery when we stop reckless government spending and allow the necessary adjustments in the economy to take place. Such adjustments do not require tax increases; they require economic literacy.

If this all seems too amazing to be true, you are on the right track. It’s obviously not the whole story. In fact, major taxes were simply left out of the account.

Most egregiously, Social Security “contributions” were treated at as insurance payments not taxes. (This improper since the government does not think of Social Security as insurance; no citizen has contractual rights in the matter.) BEA also left out state sales taxes.

Inclusion of these additional taxes pushes the total tax burden to over 20 percent, which is quite bit more than 9.2.

But that is not the largest problem with the BEA estimate of current fiscal burdens.

Last year’s Recovery and Reinvestment Act (the “stimulus”) included tax credits that reduced the amount of money Americans pay in taxes temporarily. However, spending increased by over $500 billion, and this has been financed by record deficits. The deficit for 2009 was $1.4 trillion, and the one for 2010 is projected at $1.84 trillion. Deficits are deferred taxation. Taxpayers will pay interest on the additional debt the Obama administration has run up until we pay off the principal. The claim that the tax burden has fallen is, to say the least, disingenuous. Increased government spending is being financed in a way that will make its true burden apparent only at some later date.

Further difficulties arise with the BEA estimate of the tax burden when you recognize that business taxes ultimately get passed on to some group of consumers. Federal, state, and local tax receipts added up to $3.3 trillion in 2009, 27.5% of personal income, as Kevin Drum of Mother Jones points out.

Moreover, this percentage fails to include government’s real resource costs. The true costs of the State include not only money taxed and spent on resources, but the effects of increased regulation. In economic terms regulation is de facto taxation. There is no economic difference between the State controlling resources through tax-financed spending and its taking effective control of resources by regulation. There was already heavy regulation of American industry before Barack Obama entered office, and regulation has increased since then. (The cost of emission controls alone was estimated at 10 percent of government purchases 20 years ago. The cost of all regulation was estimated to have exceeded $600 billion in the 1990s.) The Omnibus Land Management Act of 2009 added over two million acres to the National Wilderness Preservation System. The Fraud Enforcement and Recovery Act and the Credit Card Accountability Act increased regulation over banking. We must also add in the takeover of GM by the Treasury, leaving out the part that went to the UAW.

Obama’s policies will increase taxes even more in the future. So-called health care reform will result in heavier explicit and implicit taxes. High rates of taxation and regulation correlate with slower economic growth. Increased government borrowing deprives private investors of capital for projects. Since government borrowing crowds out private investment, deficits amount to a tax on future economic growth in private industry. Of course, Obama expects the Recovery and Reinvestment Act is to propel America’s economy forward but his expectations are wholly unwarranted. Government has an extremely poor track record of investing money productively.  One need only look at the record of countries like Sweden and West Germany after World War II to see how taxes stunt economic growth. They grew rapidly when they had low effective tax rates. Then expansion of the tax burden in the 1960s and 1970s corresponded with slower economic growth. The Swedes realized improved economic performance during the 1990s but only after tax and welfare reform lessened the load.

The BEA staff itself estimates that the tax burden was 30.2 percent of national income in 2009 (as opposed to personal income). Taxes were 23.8 percent of national income during Truman’s presidency. Summing up all the aforementioned figures on spending and regulation leads to the conclusion that the real economic burden of government in America is over 50 percent, and rising.

The BEA is playing statistical games. In real economic terms the costs of spending and regulation have gone up substantially since Obama entered office. Worse still, Americans can expect to bear even higher burdens in the future. Concern over rising taxes is justified not merely because taxes are actually higher, but because higher taxes mean less prosperity and less freedom.  Increased federal spending and regulation constitute real and unnecessary burdens for the American public.  These burdens can and should be reduced.  It might first, however, be necessary to educate more Americans as to the true nature of taxation.

Wall Street Pit

The Washington Examiner

Time

Psst: USA Today didn’t count the second biggest federal tax or a major state tax.

Key word is “controlled”. I wonder if the IRS will care to define what that means.

FEE Timely Classic:
“The IRS Now and Forever” by James Bovard