• Subscribe to Crisis

  • Slaves to Words

    by Thomas Sowell

    We could definitely use another Abraham Lincoln to emancipate us all from being slaves to words. In the midst of a historic financial crisis of unprecedented government spending, and a national debt that outstrips even the debt accumulated by the reckless government spending of previous administration, we are still enthralled by words and ignoring realities.

    President Barack Obama’s constant talk about “millionaires and billionaires” needing to pay higher taxes would be a bad joke, if the consequences were not so serious. Even if the income tax rate were raised to 100 percent on millionaires and billionaires, it would still not cover the trillions of dollars the government is spending.

    More fundamentally, tax rates — whatever they are — are just words on paper. Only the hard cash that comes in can cover government spending. History has shown repeatedly, under administrations of both political parties, that there is no automatic correlation between tax rates and tax revenues.

    When the tax rate on the highest incomes was 73 percent in 1921, that brought in less tax revenue than after the tax rate was cut to 24 percent in 1925. Why? Because high tax rates that people don’t actually pay do not bring in as much hard cash as lower tax rates that they do pay. That’s not rocket science.

    Then and now, people with the highest incomes have had the greatest flexibility as to where they will put their money. Buying tax-exempt bonds is just one of the many ways that “millionaires and billionaires” avoid paying hard cash to the government, no matter how high the tax rates go.

    Most working people don’t have the same options. Their taxes have been taken out of their paychecks before they get them.

    Even more so today than in the 1920s, billions of dollars can be sent overseas electronically, almost instantaneously, to be invested in other countries — creating jobs there, while millions of American are unemployed. That is a very high price to pay for class warfare rhetoric about taxing “millionaires and billionaires.”

    Make no mistake about it, that kind of rhetoric wins votes for political demagogues — and votes are their bottom line. But that is totally different from saying that it will bring in more tax revenue to the government.

    Time and again, at both state and federal levels, in the country and in other countries, tax rates and tax revenue have moved in opposite directions many times. After Maryland raised its tax rates on people making a million dollars a year, there were fewer such people living in Maryland — and less tax revenue was collected from them.

    In 2009, many people specializing in high finance in Britain relocated to Switzerland after the British government announced plans to take 51 percent of high incomes in taxes.

    Conversely, reductions in tax rates can lead to more tax revenue being collected. After the capital gains tax rate was cut in the United States in 1997, the government collected nearly twice as much revenue from capital gains taxes in the next four years as in the previous four years.

    Similar things have happened in India and in Iceland.

    There is no automatic correlation between the direction in which tax rates move and the direction in which tax revenues move. Nor is this a new discovery.

    Back in the 1920s, Secretary of the Treasury Andrew Mellon pointed out that people with high incomes were simply not paying the high tax rates that existed on paper, because they were putting their money into tax shelters.

    After the tax rates were cut, as Mellon advocated, investments flowed back into the private economy, producing higher output, rising incomes, more tax revenue and more jobs. The annual unemployment rate in the next four years never exceeded 4.2 percent, and in one year was as low as 1.8 percent.

    Despite political demagoguery about “tax cuts for the rich,” in human terms the rich have less at stake than working people. Precisely because the rich have so many ways of avoiding taxes, a high tax rate is likely to do them far less harm than it does to the economy, on which millions of people depend for jobs.

    COPYRIGHT 2011 CREATORS.COM

    The views expressed by the authors and editorial staff are not necessarily the views of
    Sophia Institute, Holy Spirit College, or the Thomas More College of Liberal Arts.

    Subscribe to Crisis

    (It's Free)

    Go to Crisis homepage

    • Harri Laaksonen

      I know that I am engaging in “reductio ad abserdum” but the logic seems to point to a utopia where we reduce the tax rate to 0 and government incomes go to infinity.

      We do need to collectively support some functions. Economics 101 also speaks about private goods that we should pay for on a by use basis and public goods that we need to support for the good of all. The example is the light house on the reef. I take it as a huge mistake to make airtrafic control a billable service for the airlines when it is a common good without which travel would be a practical impossibility. Traffic laws give me the freedom to drive down the road, within limits, without having to have a tank.

      I guess my experience of public education is hopelessly out of date since it was in the ’50′s and 60′s. In a small town we learned and went on to college with decent SAT scores and graduated.

      I will leave the rant at this point except to remind us all, (myself included) that there is a cost to not funding those in need and we often pay it in terms of crime and social unrest. Somalia has no organized tax system, but it does have pirates.

    • Richard A

      It seems evident that taxes can’t be 0% (because the government would have no revenue) and can’t be 100% (because the government would have no revenue), looked at strictly from the point of maximizing revenues. The debate is about what number between those two is “optimal”, and to point out that it requires more thought than just to suppose, as most big government activists do, that to raise more revenue you have to raise taxes.

      I liked your example of lighthouses as a public good. When Franklin Pierce vetoed legislation making the Federal government responsible for maintaining the lighthouses on the Mississippi River, the opposition made exactly that point. Turns out, though, that steamboat operators and insurers of transport on the Mississippi had a vested interest in the safety of navigation and set up a system to pay for maintenance among themselves. And the costs of that were borne by those who actually traveled on the river, or shipped goods along it (or bought goods shipped along it).

      The government wants to be a box so big you can’t think outside of it. But we really should try.

      • Carl

        “The government wants to be a box so big you can’t think outside of it.”

        Awesome quote!

    • Cord Hamrick

      Harri Laaksonen:

      I don’t think you’re engaging in reductio ad absurdum; if you were, that would be a good thing because reductio, when it works, is a perfectly good argument.

      But here, you’re using a logical fallacy (“straw man”) rather than a good argument (but innocently; I’m not accusing you of any dishonesty).

      You’re saying “If reducing rates leads to increased revenues…” but what Sowell said was that reducing rates can lead to increased revenues. By taking out the “can” you’ve made Sowell say something he didn’t say, which is called a “straw man” argument. Refuting it is not the same as refuting Sowell.

      Likewise, you seem to think Sowell opposes helping those in need, or funding necessary government services. He doesn’t. (That too is a straw man.)

      Now it just so happens I’ve read more of Sowell’s writings than he can fit in a single article in a small space. So I know pretty well what he really is thinking, and what parts have been left out for brevity’s sake.

      This will be a long post, so I’ll break it into sections.

      …continued…

    • Cord Hamrick

      On Tax Rates

      For income tax rates, there is a point of maximized revenue, and it is neither 0% nor 100%, but somewhere in between.

      For, of course, at 100%, nobody bothers working because the government takes all their income. And at 0%, people work a lot but the government gathers none of it.

      So the point of maximum revenue is someplace in the middle. In fact, there is a curve (called the “Laffer curve”) plotting how much revenue government gets at different tax rates. The shape of this curve is: It starts at zero revenue for a tax rate of 0%. Then it gets higher as you go up, until you reach the point of maximum revenue. After that, it starts getting lower and lower again until you hit 100%.

      The point of maximum revenue differs, though, for people of different incomes. The reason is that the more income you have, the better you are at hiring tax accountants or putting it in tax shelters or making your money overseas instead of in the U.S.

      Also, the incentive to work drops as the amount of income you’ve already made rises, because once you’ve covered your basic needs, “everything else is gravy” (that is, extra income beyond a certain point is optional and may not be worth the work-time required to make it). So, the wealthier you already are, the more likely it is that if the government raises rates, you’ll say to yourself, “Is it worth it to me to work another 5 hours when I know I’ll only get paid for half that time? Naaah.”

      As a result of these behavioral adaptations, you can tax poor people 50% of their income and they’ll keep working (although as you increase the rates they’ll start doing more and more work “under the counter” in cash).

      But you can only tax high-income-earners at about 25% of their income before they start moving their income elsewhere.

      This means that the point of MAXIMUM government revenue is a “regressive” tax in which poor people were taxed at about 40%, lower middle class at 35%, upper middle class at 30%, and the wealthiest folk at 25%…or some numbers to that effect. (I can’t give you precise numbers because other factors, like the health of the economy overall, can also affect them a bit.)

      Anyway, did you follow that last statement? Maximized revenue means taxing the poor at higher rates than the wealthy. That’s perverse! Nobody recommends that.

      But if you look at just the revenue you get from taxing the wealthiest folk at 25%, you find it’s more than you’d get if you taxed them at 50%. Because if you go to 50%, some stop working and others work outside the U.S. or reorganize their assets to be less taxable.

      Interestingly, if you tax the wealthy at 25%, you make about the same revenue as if you taxed them at 30% or 35%. So, on a graph of tax-rates to revenue, the “peak” isn’t a sharp-cornered peak; it’s more of a plateau.

      So as far as revenue is concerned, it makes little difference if you tax at 25% or 30% or 35%. But it makes a difference in other ways. At 25% there’s less circumvention (legal and illegal) going on than at 35%.

      So folk like Sowell reason, “If you aren’t going to get appreciably more revenue, why not set the rates at the low end of the plateau? That way people spend less time and effort and resources on circumventing taxation, and more time, effort, and resources on economic productivity?” The revenue is the same either way, but the overall economic benefit to individuals is higher at 25% than at 35%; so, you get a wealthier society overall.

      So, as you can see, Sowell doesn’t want to entirely defund government services; indeed, what he recommends can make more revenue available. Of course if you drop the top rate below 25% revenue really will start to fall. But Sowell isn’t recommending that. He’s only recommending reducing the top-bracket tax rates to a percentage that’s on the “low end of the plateau.”

      …continued…

    • Cord Hamrick

      …continuing…

      On Entitlement Spending

      “Waitaminute,” you might say. “I just know I’ve heard right-wingers talking about defunding or reducing government services for the poor.”

      Well, yes. You have.

      But have you heard their arguments about why?

      Perhaps you assumed it was because they were all cold heartless bastards who didn’t care about the needy.

      But that’s not true; in fact, the opposite is true: Right-wingers (on average, and with exceptions) are more generous to the poor than left-wingers in the U.S.! They give about twice as much to charity (both as a percentage of income, and in dollar amounts) as left-wingers do. They also volunteer in the community more, donate blood more, and so on. In short, they care more. (Search online for the research Arthur Brooks did on this topic; he published it in a book called Who Really Cares?; it’s very well documented and the numbers are unambiguous.)

      So clearly it’s not true that right-wingers hate poor people and like to kick puppies. (The left-wing election-time propaganda is just that: Propaganda.)

      “Okay,” you may say, “Then why reduce social services spending by the government?”

      Well, for several reasons:

      1. Constitutional conservatives believe government handouts are largely unconstitutional.

      2. Good research shows that government handouts tend to “crowd out” private charity, thereby replacing private charity instead of adding to it.

      Europe demonstrates the end result: The giant welfare state there has so destroyed the culture of private charity there that most Europeans have never given money to the poor themselves (“isn’t that the government’s job?”) and very few have ever given more than 1% of their pre-tax income in a year. In America even the rather stingy left-wingers average 3-4% of their pre-tax income in giving, and right wingers, among whom the culture of giving remains more intact, give about 6-7%.

      3. Government entitlement spending is the part of our budget which is currently increasing beyond sustainability.

      A lot of people don’t understand how bad it is. Medicare and Social Security will soon exceed 30% of GDP by themselves. Now, no tax system in the last 100 years in America has managed to collect more government revenue than about 20%, no matter how the tax rates were structured. There’s no reason to think we ever could convert more than 20% of GDP to revenue, even if we wanted to.

      If entitlements are not reformed, then in 20 years or so we could set all other federal spending (defense, law enforcement, transportation, everything) to zero and we’d still be in a budget deficit because of Social security and Medicare. Therefore benefits will have to be cut.

      …continued…

    • Cord Hamrick

      …continuing…

      Sure, we can cut defense a fair bit (close some European bases and whatnot). And we can let the highway system rot. But in the end, Social Security and Medicare outlays need to come down by about a third in the next 20-40 years. The only alternatives are hyperinflation (i.e., “printing money” to meet our obligations), or government default, or both.

      That’s the deal.

      4. Folks who receive entitlements from government tend to assume it as a right, developing a “sense of entitlement.” By contrast, folk who receive voluntary charitable assistance from their neighbors tend to be grateful.

      5. Elected officials involved in structuring entitlement funds often do so in a way calculated to help their political allies; it is thus a corruptive influence in government.

      6. Folk who give voluntarily to assist their neighbors tend to be discerning about to whom they give money; as a result, they feel good about where their money has gone and tend to feel a sense of community with the people they’ve helped.

      By contrast, those who work hard only to have government forcibly take some of their earnings and give it to people they don’t know, feel cheated. They feel their fellow man is picking their pocket. This divides a community leading to an “us versus them” attitude between rich and poor.

      (Indeed you showed some of that yourself when you suggested that we have to give money to the poor or else there’ll be “crime and social unrest.” First, this is in fact false: Sociologists proved decades ago that crime is related to cultural mores, not to poverty. Second, look at what you said: You’re suggesting that our reason for helping our neighbor is not because we love him, but because if we don’t, he’ll smash our windows. Without meaning to, you’ve adopted a view of the needy as mobsters running a “protection racket”: “Nice neighborhood you have, there. It’d be a shame if anything happened to it.”)

      Add up all these reasons, and you can see why right-wingers in the U.S. are…

      (a.) Quite willing to reduce tax rates on the wealthy; and,

      (b.) Quite willing to reduce entitlements;

      …even though when it comes to voluntarily giving their own money, they’re the most generous members of society.

      Make sense?

    • Cord Hamrick

      I wanted to add a few more things to this whole discussion.

      It is sometimes impossible for folks unfamiliar with conservative and libertarian views to understand them at first, because they lack familiarity with the basic underlying concepts.

      As a result of this lack of understanding they often fall back on the slander that conservatives are “heartless” or “hate government.” These charges are provably false, but if you can’t think of any other reasons why conservatives and libertarians say what they say and do what they do, then “heartless” and “anti-government” are all you have.

      To help the reader “brush up” on the underlying economic concepts, I have provided the following URLs to videos and articles.

      Understanding them makes it much easier to read Thomas Sowell and similar writers, and to understand why conservatives and libertarians propose the policies they propose.

      Here are the links:

      On economic damage from tax increases:
      http://tinyurl.com/3drkkf4

      On why conservatives (like Thomas Sowell) value free enterprise over government (except for defense and law enforcement):
      http://tinyurl.com/2dcj7np

      On how wealth is created in society (not a zero-sum game):
      http://tinyurl.com/2dryuuz

      On the impossibility of fixing our budget-deficit problems by increasing taxes on “the rich”:
      http://tinyurl.com/4mxx9ru

      On the Laffer Curve (basic intro), part 1:
      http://tinyurl.com/yp3ruy

      On the Rahn Curve (showing relationship between government tax revenue as a percentage of GDP and economic prosperity), :
      http://tinyurl.com/66j748k

      I hope all of these are helpful.

      Finally, Crisis Magazine is a Catholic magazine/site.

      Is any of what I’ve said (or the things I’ve linked) incompatible with Catholic teaching?

      In a word, NO. All of this is not only in accord with Catholic teaching, but is presented here to help us understand how to better live out that teaching when we, as Catholics, interact with the public sphere through policy advocacy and voting.

      We are responsible for taking care of the needy. We are our brother’s keeper.

      We are not merely responsible for doing this to a degree and in a way which makes us feel good. We are responsible for doing it correctly and effectively.

      One purpose of the arguments presented above, and of the related links, is to show that even if throwing a lot of money at entitlement spending makes us feel good, it actually is disastrous in other ways.

      Since we will need to reduce entitlement spending anyway (or risk hyperinflation or default), we might as well do so in a way which helps the poor but also promotes long-term stability and prosperity (which helps the poor, not to mention everyone else!).

      In short, Jesus calls us all to love God with all our heart, soul, mind and strength, and our neighbor as ourselves. In loving our neighbor, we must engage both our emotional compassion and our prudent intellect. We must not merely make a show of enacting policies intended to help; we must enact policies which actually help.

      It turns out that conservative and libertarian thinkers in the U.S. right now have an excellent grasp of the economic, political, and social concepts which permit us to effectively and prudently love our neighbor.

      Hence the need to brush up on those concepts.

    • Rich Browner

      Actually, what I get from the article is this:

      Don’t bother trying to REALLY tax the rich, they will ALWAYS find a way to pay little if anything.

      Cord, I do admire your thoroughness and your style.

    • Cord Hamrick

      Rich:

      Cord, I do admire your thoroughness and your style.

      Well, thank you. I appreciate your kind words, especially if you were willing to write them despite disagreeing with (or, at least, not being happy about the implications of) what I was saying!

      Yes, I think that the wealthier a person is, the more effectively they can hide their wealth from taxation.

      Remember how Teresa Heinz Kerry (John Kerry’s wife) paid something in the neighborhood of 15% income taxes on her income in 2003? And that’s if you don’t count the income that wasn’t taxable; if you count that, the amount she paid was less than 1% of her increase that year.

      That being said, it is usually not true that a person can avoid taxation altogether, unless they simply stop having income.

      Instead, it seems truer that, when one is wealthy enough to have multiple streams of income to choose from, one can allocate those streams in countries, or asset types, where the rate is lower rather than where it is higher.

      This is one way that taxing the wealthy is more like taxing a corporation than like taxing an individual. (Another is that they have accountants and lawyers who’re paid well to pinch every taxable penny until it screams.) Corporations don’t like the high corporate income taxes in the U.S., so they “offshore” their operations whenever possible to more friendly countries. The outcome can easily be foreseen!

      Now most folk don’t understand this intellectually. They just know viscerally that the wealthy and the corporations sure do seem to get away with a lot. So, when Democrats say, “Increase their tax rates! Increase them to 45%! No, 50%! To heck with that, make it 90%!” …many of us think, “Yeah, that’ll teach ‘em.”

      Except it won’t. Indeed, it’ll make them feel that much more vindicated for the circumvention they already do.

      By the way, much of that circumvention is entirely legal. It was made possible by particular rules in the tax code. These were added by politicians, who did so at the behest of the corporations or wealthy folk in question.

      Often, doing so cost the corporation or the wealthy person several tens of millions of dollars in lobbyists and campaign contributions. But if you can save a hundred million or a billion that way, well, it’s easy math!

      So, the reasons I don’t mind decreasing tax rates on the wealthy (or on corporations) are:

      1. Our revenue won’t change much either way; at least, it won’t get above 20% of GDP.

      2. The wealthy will pay the same amount of actual dollars whether we tax them at 25% or 75% (or, for corporations, at 5% or 15%). But as they’ll do more business here at 25%/5% than at 75%/15%. And that means more jobs and an increase to our GDP.

      The only folks who get hurt are other countries with higher rates, and the tax attorneys, accountants, lobbyists, and political campaigns who’re all now more expensive than the amount of tax savings they can provide!

      3. When we talk about “the rich”, they are of two kinds:

      (a.) The Somewhat Rich: Folk in the $1 million to $100 million range. These are mostly small business owners whose business assets and income are reported on their personal taxes; and,

      (b.) The Super-Rich: Folk in the $100 million-plus range, who’re generally connected to politicians, multinational corporations, or both (e.g. Teresa Heinz Kerry).

      Now the sad truth is that even if we “ate the rich” (that is to say, if we taxed the Super-Rich at 100% and confiscated all their property besides) there isn’t enough money to cover our exploding entitlements costs.

      So when someone says “increase rates on the rich to solve our entitlement problem” he either means only the Super-Rich — in which case there not only aren’t enough of them to make a difference, but they have the ability to avoid paying more no matter how much we increase rates — or, he means both categories of “rich.” That is, he’s including the “Somewhat” rich.

      Now even the “Somewhat” rich are quite well-to-do compared to, well, me.

      But these small-business entrepreneur types are the folk who employ most Americans. Moreover, they don’t have nearly the ability to circumvent taxation that the super-rich have.

      So what happens when you increase income taxes to 50% on “the rich”?

      Well, the Super-Rich don’t pay a dime more; they just reorganize their income streams.

      But the “Somewhat Rich”? They downsize their business instead of expanding. They have to, because they lack the means to circumvent (most of) the extra taxes.

      So more folk get laid off. Unemployment rises. And the government responds, saying, “It’s a crisis! We need to extend unemployment benefits!”

      Taxpayers reply, “Uh, we’re already in deficit spending. Where are we going to get the money?”

      “We’ll just have to raise taxes!”

      Sigh.

      And so it goes.

    • Rich Browner

      Well said, Cord. Almost everything you have stated here I have understood for quite some time. I appreciate that you take the time to articulate clearly many things that can help form solid opinions about what it means to be a Catholic in this day and age.

      Sadly, I do not find the prescription for justice in either camp of our two political parties. Neither puts the gospel first. Both pay good lipservice though.

      People can state that we should lower the rates of taxation on the rich to create jobs, and there are circumstances where that happens, but there are also circumstances where that money saved is not going to create more jobs.

      I am not one of those people who believes we can tax our way out of this problem. We do need to stop spending. But revenue DOES matter. That can’t always be ignored. There are a number of very good ideas out here in the interwebs and among the punditocracy that are wise and I think have great merit. Most, if not all of them will never be adopted because we have a population that will not often give up easily what it has or wants, nor shy away from wasting money on what it fears.

      I will say that I find it unfortunate that so many Catholics tie themselves so closely to the Republican Party. Being a conservative Republican seems to have become almost as much a part of their religion as belief in the Trinity. I know there are many on this site who believe the same of many Catholics who vote Democratic. I am sure there are. Too many are unwavering in this fashion.

      So, quite often you will sense some distaste in my mouth. Thanks for your patience, always.

    • Bronx2

      The article has many valid points but fails to mention that taxes as Excise (Tires, Gasoline, Telecommunications) Property, Employment , Estate/Gift, and Sales,must be considered when discussing this topic.

      The wealthy do use tax shelters to mitigate not only income tax but also some of the other aforementioned taxes as well employing armies of attorneys who spend inordinate time to accomplish same. Some of these taxes, as income tax, where more and more former taxpayers employ methodologies to eliminate their burden, are becoming more regressive. Taxes which appear to be regressive as Excise are becomin more progressive as the affluent do not know or feel it costs too much energy to surmount the tax.

      To eliminate tax loopholes in income , estate and employment tax only invites more tax avoidance.Therefore the government should tax in areas where it is almost impossible ( although I have seen it done successfully) to compromise tax responsibility as Excise, Sales and Property.

      We should disabuse ourselves from addressing the concept of social justice or the biblical command to render to Caesar since most are secular humanistic agnostic types, who pay no attention to these historical Christian concepts to assist the needy. These affluent types justify their actions by pointing to government waste ,fraud and abuse and so the discussion of taxes must be coupled with the inclusion of government malfeasance.