Economic Effects of Current Tax Policy
One of the biggest sources of problems government imposes on individuals, businesses and the economy is taxes. It has truly been said that “the power to tax is the power to destroy.” The article just linked invokes that famous quote from Chief Justice John Marshall 193 years ago. It also notes that after the first Supreme Court decision on the Affordable Care Act, AKA Obamacare, virtually any federal government monetary charge on American citizens can  be considered a tax, and according to the Constitution, only Congress has the power to determine taxes. No matter whether they are called “fees”, “penalties”, or “revenue enhancements”, they are all to be considered types of taxes. If Congress should decide to target a particular class of citizenry for destruction, the law is no longer a shield. All Congress would have to do is to legislate that if any person does not fit a particular set of qualifications (e.g. not having health insurance), they are to be hit with a tax fine. God help us if Congress were to delegate to the executive branch, as they often do, decisions on how some expenditures are to be financed. If that happened the President or officials and bureaucrats under him can create destructive taxes by Presidential edict.
Government taxes are destructive to society in more than one way. The last paragraph envisioned ways in which the government could penalize classes of people with taxes for their behavior or associations. However, even if taxes have the purpose of financing essential government functions, they will still be destructive. When government takes money away from individuals or companies, it takes away individual power to direct economic assets toward their own purposes and goals. A company may desire to produce something that the economy greatly needs and people dearly want. But if government  makes off with the needed capital, the company might have to diminish or even forego their production.
Moreover, government taxation is even more harmful if the economic resources taken from the private sector are wasted by using them on projects that give no or insufficient economic return. I on this website and many others (see here and here and here and here and here) have observed that government officials and bureaucrats are very bad investors. If scarce economic resources are directed by government to companies that fail or give very poor returns, those resources that are not recoverable and are consumed are denied to the rest of the economy forever. Those resources that are recoverable, denied to the private sector for a time, at the very least account for an opportunity cost.
If the burden of taxation grows larger than a company is willing to bear, they might well consider relocating  to a different country with more favorable tax policies. Earlier this year I published a post on just such a danger that even had the New York Times alarmed. The Obama administration has pledged support for the G20’s “Base Erosion and Profit Shifting” project (BEPS) that would increase and tighten taxes on multinational corporations. In particular, American corporations creating intellectual property (IP) in the United States and who move their IP to European countries to take advantage of tax breaks there would no longer be able to do so unless they actually created the IP in those European countries. This gives IP creating multinationals an overpowering incentive to move lock, stock, and barrel to European countries with more conducive tax policies. (You just know that the U.S. economic environment has assumed a truly grim state when even near-socialist European countries have less burdensome taxes!) The New York Times has reported that many multinationals have internally begun discussing just such a move. The Times has warned that a deluge of multinationals decamping for Europe might begin as soon as the end of the year. At this late point in time, about the only thing to be done is to reduce American business taxes to internationally competitive rates. As if that will happen any time soon!
A revealing example of what could happen with significant tax rate cuts is provided by the years of the Reagan administration. During those years federal income tax revenues were reduced as a fraction of GDP by 1.1% from 9.1% in 1981 to 8% in 1989. This led many people to conclude the Reagan tax cuts did not pay for themselves as advertised by supply-siders. However, the GDP in constant 2005 dollars was $6.087 trillion in 1981 and $8.231 trillion in 1989. If you do the arithmetic you find that federal income tax revenues in 1981 were $553.9 billion and in 1989 they were $658.5 Billion. All of this was calculated using constant 2005 dollars to remove the effects of inflation. I do not know about you, but I would say this calculation demonstrates the Reagan tax cuts paid for themselves quite conclusively. Just as important, it increased the incomes of individual families and corporations. The superiority of Reagan’s supply-side policies over Obama’s Keynesian, collectivist policies can be seen by comparing their separate GDP growth records, as shown in the graph below.
We discussed this comparison in somewhat greater detail in the post Echoes of the Great Depression: America, Europe, and Japan.
Arthur Laffer, the father of the Laffer curve, has reported  another metric on the advantages of Reagan’s large tax cuts. The “infamous” 1% of top income earners paid  income taxes that were 1.5% of GDP or $91 billion constant dollars in 1981. By 1989 after seeing their incomes rise rapidly, the top 1% paid a full 2% of GDP or $164.6 billion constant dollars. Yet all of this happened when the highest income tax rate on the top 1% fell 60%, from a 70% tax rate in 1981 to a 28% tax rate in 1989! Take that Thomas Piketty!
Should we really wish to cure our current economic malaise, look to Reagan not to Obama! The prescription we should take is the free-market one of less taxes and less government regulation.
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The negative effects of the fed tax policy are well apparent. I do believe , however, that the public dislike for “taxes” has as much to do with the squandered $ due to waste, fraud, and abuse. Along with the restructuring of Tax code, the states need to reclaim their power that was usurped by the fed gov. State and local basicly are just able to pick up the scraps the the fed gov lets them have. State and local gov are better suited to resolve there problems.
I agree the waste, fraud, and abuse makes the taxation that makes it possible hard to take and is part of the destructive effects of taxes. But even if those bad effects did not exist, taxation would still be destructive of the private sector by denying the private sector of assets for investment.