Friday, April 15, 2011

US Budget Debate: The Path Towards “Running Out of People’s Money”

It is tax deadline day today, which makes a good day to deal with some du jour tax related issues.

In the US, there has been ‘fierce’ ongoing budget- budget deficit cutting debate which has apparently been used as a staging point for the 2012 Presidential elections.

clip_image001

The Wall Street Journal has this budget cutting table showing the Ryan-Obama square-off.

Given these, Professor Walter E. Williams, has a timely and apropos article, where he makes an assumption that considering President Obama’s “class warfare-soak the rich” rhetoric, the US government appropriates

ALL earnings of the “rich” income group $250K and above ($1.4 trillion) +

Fortune 500 corporate profits ($400 billion) +

the assets of US Forbes 400 billionaires ($1.3 trillion) =

The $3.1 trillion won’t be enough to pay for the President proposed $3.7 trillion budget for 2012.

The Business Insider has a breakdown of these proposed budget

Professor Williams writes, (bold highlights mine)

Politicians, news media people and leftists in general entertain what economists call a zero elasticity view of the world. That's just fancy economic jargon for a view that government can impose a tax and people will behave after the tax just as they behaved before the tax, and the only change is more government revenue. One example of that vision, at the state and local levels of government, is the disappointing results of confiscatory tobacco taxes. Confiscatory tobacco taxes have often led to less state and local revenue because those taxes encouraged smuggling.

Similarly, when government taxes profits, corporations report fewer profits and greater costs. When individuals face higher income taxes, they report less income, buy tax shelters and hide their money. It's not just rich people who try to avoid taxes, but all of us – liberals, conservatives and libertarians.

What's the evidence? Federal tax collections have been between 15 and 20 percent of the nation's Gross Domestic Product every year since 1960. However, between 1960 and today, the top marginal tax rate has varied between 91 percent and 35 percent. That means whether taxes are high or low, people make adjustments in their economic behavior so as to keep the government tax take at 15 to 20 percent of the GDP. Differences in tax rates have a far greater impact on economic growth than federal revenues.

So far as Congress' ability to prey on the rich, we must keep in mind that rich people didn't become rich by being stupid.

That’s why former UK Prime Minister Margaret Thatcher once said in a TV interview (which became a famous quote-bold highlights mine)

Socialist governments traditionally do make a financial mess. They always run out of other people's money. It's quite a characteristic of them. They then start to nationalise everything, and people just do not like more and more nationalisation, and they're now trying to control everything by other means. They're progressively reducing the choice available to ordinary people.

Political interests and ambitions masquerading as noble intentions eventually will get unraveled. In short, it’s all about economics—what is unsustainable economically won’t last.

So the next step will be for US politicians to go for budget plugging actions. All accrued these actions will impact financial markets and the US and global economy.

No comments: