Laffer Curve

Government Greed Axes the Golden Goose

Stephen Michael MacLean condemns economic illiteracy

President Barack Obama mounted the bully pulpit last month, to decry the practice of ‘tax inversion’ and those corporations with the effrontery to believe in private property and the profit motive, thus escaping exorbitant tax bills by moving operations out of the United States for the welcoming low-tax jurisdictions of foreign lands.

According to an AP News report:

“Obama called it ‘one of the most insidious tax loopholes out there’ because it shortchanges the country. He said less tax revenue means the government can’t fully spend on schools, transportation networks and other things to keep the economy strong. He said the practice also hurts middle-class Americans because ‘that lost revenue has to be made up somewhere.'”

Oh, dear! Where does one begin to enumerate President Obama’s recurring penchant for economic (and constitutional) illiteracy?

A cursory critique would note the President’s assumption that personal earnings belong to the State, whose beneficence allows earners a share — but not more than their fair share.

Also notable is that this reputed constitutional scholar is more than a bit rusty on the actual text of the U.S. Constitution, which nowhere grants to the Executive authority responsibility for the quaint sobriquet of ‘internal improvements’; moreover, the Ninth and Tenth Amendments specifically reserved such public goods to private citizens and the States.

Yet it is on the economic front that President Obama’s jeremiad — sadly shared by most politicians — is most alarming.

Middle-class Americans would be among those most hurt by Washington’s tax grab, as it is corporate revenue that funds capital accumulation, innovation, and economic growth. Tax away profit, and you tax away employment opportunities.

“The old truth still holds,” Margaret Thatcher once told a Conservative conference: “there is much harm and only modest good that governments can do to promote a successful economy. And the more sophisticated the global economy becomes, the truer that will be.”

Moreover, to denote a ‘middle’ implies two opposites; within the political context, the ‘poor’ and the ‘wealthy’. State redistribution affects the three classes disproportionately: Wealth can take care of itself — as in the case of inversion, moving off-shore to escape punitive U.S. tax law … the poor, the dependent clientele of politicians, are taken care of through welfare schemes … while the middle class is left to its own devices. Yale sociologist W.G. Sumner skewered this phenomenon:

“All taxation has the same effect. It presses hardest on those who, under the conditions of their position in life and the demands which are made upon them, are trying to save capital and improve their circumstances. The heavier it becomes, the faster it crushes out this class of persons — that is, all the great middle class…”

The case against the folly of tax-greed was made a century earlier by Adam Smith in Wealth of Nations. “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasury of the state.”

Furthermore, “a tax may either take out or keep out of the pockets of the people a great deal more than it brings into the publick treasury,” Smith wrote. This is the essence of Laffer Curve analysis that proves that taxing beyond a certain point results in less tax collected.

If President Obama were truly interested in American economic well-being, he would be receptive to the reality that high taxes not only depress tax revenues, but starve entrepreneurial innovation of its necessary capital structure. Smith, too, foresaw this tax perversion:

“It may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy some of the funds, which might enable them more easily to do so.”

But ideology blinds many of the Washington élite. Not content to tax within the bounds of justice, governments have become gluttonous tax-eaters, feasting upon the sustenance of individual and corporate tax-payers. Like the greedy farmer who axed the goose that laid golden eggs, parasitic states will tax their host-citizens to financial death.

Stephen Michael MacLean is a freelance researcher, residing in Canada. He blogs as the Organic Tory at the Disraeli-Macdonald Institute