Tuesday, October 05, 2010

Attempting the impossible - explaining economics to politicians

Walter Williams tries to explain the effects of raising taxes on corporations to those politicians who advocate such a change.
What about the politician who tells us that he's not going to raise taxes on the middle class; instead, he's going to raise corporate income taxes as means to get rich corporations to pay their rightful share of government? If a tax is levied on a corporation, and if it is to survive, it will have one of three responses, or some combination thereof. One response is to raise the price of its product, so who bears the burden? Another response is to lower dividends; again, who bears the burden? Yet another response is to lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of the tax.

Because corporations have these responses to the imposition of a tax, they are merely government tax collectors.

They collect money from people and send it to Washington. Therefore, you should tell that politician, who promises to tax corporations instead of you, that he's an idiot because corporations, like land, do not pay taxes. Only people pay taxes.
And what will be the result? When corporations have less money to spend, they will have less money to hire workers or expand their businesses.
Policies that raise the cost of capital formation such as capital gains taxes, low depreciation allowances and corporate taxes, thereby reduce capital formation, and serve neither the interests of workers, investors nor consumers. It does serve the interests of politicians who get more resources to be able to buy votes.
Arthur Laffer chimes in today with statistics from states have raised their income tax rates on higher-income earners compared to those states with no income taxes. Washington state is facing an initiative backed by Bill Gates Sr. to impose a 5% tax on individuals earning over $200,000 a year and couples earning over $400,000 while reducing some other taxes for others.
To imagine what such a large soak-the-rich income tax would do to Washington, we need only examine how states with the highest income-tax rates perform relative to their zero-income tax counterparts. Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance.

In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.

It's striking how the high-tax states have underperformed relative to those with no income tax. Especially noteworthy is how well Washington has performed compared to states with no income tax.

If Washington passes Initiative 1098, it will go from being one of the fastest-growing states in the country to one of the slowest-growing. And passage of I-1098 will only be the beginning. Just look at Ohio, Michigan and California to see that once a state adopts an income tax, there is no end to the number of reasons that such a tax could be extended, expanded and increased.

Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.
Click on over to see the data.

Of course, it's a lot easier to tap into soak-the-rich populism rather than to limit government spending. And people don't seem to understand what the results will be so they buy into the demagogic taunt that anyone opposing such policies is just sucking up to the rich at the expense of the poor. As Walter Williams explains,
You might wonder how congressmen can get away with taxes and other measures that reduce our prosperity potential. Part of the answer is ignorance and the anti-business climate promoted in academia and the news media. The more important reason is that prosperity foregone is invisible. In other words, we can never tell how much richer we would have been without today's level of congressional interference in our lives and therefore don't fight it as much as we should.
Maybe people today are finally waking up to the result of such policies.