Making things worse:
Governments all over America are struggling during this economic downturn. Without exception, less economic activity means fewer dollars available for public expenditures. And, because most municipalities and states in our fair land spend as much or more than they receive in good times, a recession like this one means red ink by the gallon. The federal government maintains the appearance of solvency by its unique ability to borrow and create money, but it’s just as broke as California or Detroit.
One fascinating part of this fiduciary ordeal is watching politicians attempt to fill the huge gaps between income and outgo. Such efforts range from the predictable — raising taxes on the rich in Maryland — to the insane. California’s Governor Arnold Schwarzenegger’s proposal to create a flat 15% state income tax fits in the latter category. But, most of the plans to achieve financial stability violate one or more basic principles and therefore are doomed to failure. In other words, the solutions presented as sure cures for this or that economic ailment will make this recession longer and more painful than it need be.
Take, for instance, the above mentioned fair state of Maryland. According to the Associated Press, “A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state’s finances….” The fly in that ointment is that the number of millionaires filing tax returns in Maryland has dropped by a whopping one-third. Defenders of the soak-the-rich plan claim the decrease in millionaires is due to the recession itself; fewer individuals and businesses are making big money. “Another more debatable explanation,” sniffs the AP, “would be that millionaires have simply fled the Free State.” Bingo. Rich folk are leaving New York City to avoid new taxes aimed in their direction and moneyed flight is a fact in California. Why should Maryland be any different? The bottom line is not pretty. Tax receipts in Maryland are down “17.4 percent” from a year ago.
Too bad so many on the left continue in their attempt to demonize Ronald Reagan. If there is one thing Reagan’s legacy proves, it’s that lowering tax rates raises tax revenue. This happens because lower tax rates encourage investment and risk taking, endeavors necessary for economic growth. As the economy grows, more workers and companies make more money, which in turn generates more tax revenue. This is not rocket science. When the Gipper took office, with the nation’s economy in worse shape than today, the top federal tax bracket was a ridiculous 70%. Federal receipts totaled $500,000 in 1981. Reagan cut the top tax bracket down to 28% and by 1989, the year Reagan left office, federal receipts had doubled to $1 trillion. Anybody in Maryland, California, or New York City listening? Is this thing on?
Then there is the ongoing effort by the feds to help the housing market. I hope you are sitting down because this one is really galling. Thanks again the AP, we know that “The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market. But this and other big government spending programs are turning out to have the opposite effect. [Emphasis added] Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.” These evil bond investors are faced with the following scenario. They loan money today at, say, 6%. But if the dollars they take in payment years from now are worth less than 94% of the dollars loaned out, they lose. So — naturally, predictably, and because the feds continue to violate basic economic principles – they are raising rates to hedge their bets. The bottom line according to the AP is again not pretty. “Fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won’t be able to afford.” And another $1.2 trillion circles the drain.
California, led by Governator Arnold, is a case study in how inept politicians make a bad situation worse. Decades of wild spending including built-in increases in disbursements regardless of economic conditions has finally brought the Golden State to its knees. $40 billion shortfalls perpetually haunt the state’s budget. Now that crisis has turned to desperation, talk of spending cuts reverberate in Sacramento. However, the solution of choice to close the budget gap continues to be higher taxes. To wit:
The income tax has been raised, driving more wealthy Californians into the deserts of Arizona and Nevada.
Car registration fees have just doubled, depressing new car sales at the worse possible time.
The Governor has proposed the above mentioned 15% flat tax. If enacted, wealthy Californians will pay 51% of their earnings to just the federal government and the state of California. They will also continue to pay F.I.C.A., Medicare, sales, property, car registration, and estate taxes. Why don’t we just throw our firstborn children into the fire too? Someone should remind Arnold that Nevada doesn’t have a state income tax.
Finally (for now) brainiacs in Sacramento are considering repealing Proposition 13, the 1978 legislation that limited property taxes. In exactly the same way that higher interest rates discourage housing purchases, so higher property taxes will depress an already emaciated housing market.
One of the persistent lies rolling across President Obama’s teleprompter is that opponents of his stimulus plans argued that doing nothing to fix America’s hammered economy was the right course of action. In truth, no one has argued, then or now, that the status quo is fine and dandy. The debate is about which courses of action would provide the quickest and most lasting fix to this recession. Our point here, however, is narrower yet. Messrs. Obama, Reid, Schwarzenegger, and Ms. Pelosi: All we ask is that you stop making things worse. With two hundred years of American economic history to learn from, that shouldn’t be too tough.
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Posted by Jerry Pomeroy in Budgets, Economics, Government Blunders, Taxation