Surprises uncovered in our income tax history

When was the last time you heard an intelligent conversation on taxes that was actually linked to the ballooning national debt? Does it matter that the debt has soared to $3 trillion since 2002 and all signs suggest $5 trillion will be added in the next decade? Does it matter that 20 cents on every dollar of tax revenue goes to pay the interest on the debt? Are we aware that this trajectory is unsustainable?

Cornell economist Robert Frank, in the New York Times (Dec. 9, 2007), has joined the discussion of income and outgo, challenging the nonsensical response of politicians to anyone suggesting that we need to raise taxes ”“ “It”™s your money, you know how to spend it better than the bureaucrats in Washington.” That is tantamount to an individual borrowing a bundle on his credit card and then claiming it was his, pure and simple. The sub-prime mess has vividly illustrated what happens when we forge ahead on too much credit. We have been reluctant to admit that we are actually selling off the country in bits and pieces to whomever will buy.

Mike Huckabee, the former governor of Arkansas and wannabe presidential candidate, has come out in favor of what he calls a Federal “Fair Tax,” sometimes called a value added tax, more commonly known as a sales tax. Anyone who has analyzed this proposal knows this is a regressive tax that hits those on the lower income ladder much harder than those at the top ”“ the most “unfair tax” proposal around. In order to meet the revenue level of the progressive tax system the sales tax would have to rise to 34 percent. In order to mitigate the hit on middle to lower class there would have to be a cash grant that would total $600 billion to $780 billion. The problem ”“ people in that category have to lay out the cash first and then wait for the cash grant to show up at the end of the year. Consider this: A single mother with one child who earns $20,000 annually would pay an extra $6,186 in retail sales taxes, more than eight times the $723 she currently pays in income taxes and federal payroll taxes. For starters, this plan would require the repealing of the 16th Amendment of the Constitution.

Theories behind the theories
Before this discussion becomes completely entangled in misinformation we need a brief primer on the two basic economic theories ”“ the Keynesian, beloved by Democrats, and the Supply Side, beloved by Republicans since the Reagan years. The British economist John Maynard Keynes”™ strategy for dealing with an economic downturn was to increase government spending, even creating a deficit, and/or cut taxes which should be directed to those with lower incomes to encourage more spending, thus turning around the economy.

The trick in the Keynesian theory was to reverse the strategy when the economy has recovered in order to avoid inflationary pressure.

In 1980 the nation was suffering from stagflation ”“ a combination of high unemployment and high inflation ”“ when Reagan introduced Supply Side economics, which banks on the theory that “you make it and they will buy it.” In other words, the supply-siders were in favor of leaving control of the economy in the hands of the market, no matter what. Economist Arthur Laffer of California advanced the theory that by lowering high marginal taxes, the government would stimulate economic growth ”“ the message in the “Laffer Curve.” Though far from dead, this theory has been seriously discredited.

In contrast to the Keynesian approach, Reagan cut taxes on those at the higher end of the income scale and, rather than reduce the size of government, allowed it to begin its inexorable climb to its present monumental and unmanageable size. In fact, the debt Reagan incurred in his two terms was greater than all the debt accumulated by all the presidents before him, pushing it from just under $1 trillion to some $2.6 trillion, a 200 percent increase. It appears the fiscally conservative Republicans we used to know and love have become the social conservatives, while the Democrats have become, in effect, the fiscally conservative party. The most obvious example of this switch was Bill Clinton, who, in spite of the hostility of the congress in his last six years, managed to get control of the growth of the government by raising taxes and instituting a “pay as you go” policy for programs. During his administration the debt as a percentage of GDP dropped almost 10 percent under a Democratic president with a hostile Republican Congress. Clinton”™s policy was designed to make many people rich, not just a select few. During his term he created more new millionaires than at any time in the nation”™s history.

A bit here, a bit there
What is the result of the government continually reducing its revenue stream while expanding the size of the federal government? The “trickle down” theory, another version of Supply Side theory, has definitely trickled down. The taxes that would have supplied funding for infrastructure maintenance, for support of transportation systems, countless other federal programs, some of which protect the public from poisonous imports, are not collected because of the mania for tax cuts even during an expensive war. Programs normally supported by these uncollected funds at the federal level must then “trickle down” to the next governmental level. The states, of course, are not awash in money so the mandates demanded by the federal government then trickle down to the counties where the fiscal constraints are continually ratcheting up. Since raising taxes on income earned is no more popular at this level than at the federal level other means of revenue collection must be devised.

The local sales tax has become extremely popular in recent years, particularly because it is basically hidden from the public and thus little blame can be assigned. A little bit here, a bit more there and pretty soon you”™re dealing with real money, so to speak. Here”™s the major flaw in the sales tax solution: When the economy slows up, as it is doing now, the sales tax revenue slows up also, just when more funds are needed to weather a downturn. A stunningly shortsighted solution, again, hitting the people least able to afford it.

Then there is the soaring property tax, guaranteed to drive out the growing population of elderly trying to hold on to their homes in the region. Westchester has the highest rate in the nation, not a first that we should be proud of. More on the Gordian Knot that is our tax system in the next article.