Myth: Reduced tax rates on those earning over $200,000 caused deficits.

The establishment politicians and commentators who make this claim expect you to conclude that the rich paid less income tax after the Bush tax tax rate reductions than before.   This chart, showing the most recent figures available from the IRS tells the truth.

As the chart shows, revenue from the top group was falling each year until the Bush tax cuts were enacted in 2003.  Then revenue increased every year until taxable small business profits were hit by the recession that began in 1988.

If government had collected less tax revenue from “the rich” – mostly small business owners – after the rate reductions they might deserve a share of the blame for deficits.  But in fact, the rich paid more – a lot more.

The establishment elite demonstrate their understanding of the disincentive effect of taxation when they call for taxes on choices and behaviors they dislike.  They advocate:

• Higher gasoline tax to “nudge” us out of cars and into mass transit;
• Taxes on sodas and sweets to keep us from getting fat and burdening their government dominated health care “system.”

But those same elites scoff at the obvious disincentives inherent in high income tax rates.   The income tax is a tax on risk-taking, saving, investment, and productive work – all the activities necessary for job creation.

Because higher rates on “the rich,” especially small business owners, discourage work, saving and investing, the people they are designed to target respond by curtailing business activities and thus earning less taxable income.   As a result, higher rates don’t necessarily generate more revenue.  Lower rates are less of a barrier to risk-taking, investment, business expansion and hiring, all the activities that generate more taxable profits.

In fact, as this chart shows, after the tax cuts of 2003 the deficit declined, as the rich paid more income tax.This is not the first time higher income folks paid more income tax after a rate reductions.  During the Reagan Administration there was a series of phased in rate reductions from 1981-83, and another rate reduction in 1986.  The results:

• In 1980 there were eight tax brackets and the highest was 70%.   People earning more than $200,000 reported a total of $36 Billion in income and paid $19 Billion in tax.
• In 1988 there were only two tax brackets, 15% and 28%.  The over-$200,000 group reported $353 Billion in income and paid $99.7 Billion in tax.

Over eight years taxable income reported by “the rich” rose 881% and income tax collected from them rose 425%!  But even though the government was the beneficiary of this huge windfall the political-media establishment still promotes the deception that the Reagan tax cuts caused deficits.

Last week House Speaker Nancy Pelosi was asked about the future of the Bush tax cuts of 2003.

Those tax cuts are scheduled to expire at the end of 2010.  If Congress doesn’t act tax rates will increase substantially in 2011.  Ms. Pelosi’s answer echoed the political-media establishment.  She wants to extend the tax cuts for lower income groups but not for “the rich.”

High end tax cuts have not created jobs, they have increased the deficit and they should be repealed.

In this series we’ll consider her assertion, starting with jobs.

Private sector jobs are not created by Presidents, Congress or government.  They are created when businesses risk their capital resources on expansion.  And small businesses create most new jobs.  

Any tax on a small business reduces the resources its owners can invest in expansion and job creation.  Government doesn’t create jobs but it can encourage more job creation with lower rather than higher taxes.  So-called “high end” taxpayers, those earning more than $200,000 that Obama and Pelosi have targeted for tax increases, are mostly small businesses.

At any given time the level of taxation is only one of several economic balls in the air.  Business expansion and job creation may also be affected by new technologies, demographics, prices, wars, interest rates, and a host of other factors.

But to prove her assertion that the Bush tax cuts did not help businesses create more jobs from 2003 to 2007, Ms. Pelosi will have to come up with some dazzling, counter-intuitive arguments.

As everyone is painfully aware, Job creation turned into job losses in 2008.  But there is no reasonable argument that the tax rate reductions of 2003 caused the banking and mortgage crises of 2008 that decimated the economy.  Nor, is there any coherent argument that the big tax increase on small businesses and investors, now scheduled for January, will somehow help them create more jobs in 2011.

After deliberately, adding more than $2 Trillion to the federal debt in his first 18 months in office the President and the Democrats are beginning to feel a sense of foreboding.

They have suddenly pivoted from profligate spending to seeking ways to wrench more money out of the private sector into the government till.

The first group Democrats want to suffer tax punishment as a result of the Obama deficits is “the rich,” defined as earning over $200,000, who are now targeted for a tax increase.

The problem with a tax hike on  “the rich,” as more and more Republicans are finally saying out loud, is that it’s also a tax hike on the small business sector that creates most of the new jobs.

But Democrats and their cheer leaders in the media are not impressed by this argument.  In an article titled “GOP Fairy Tales” Mother Jones writer Kevin Drum echoes the claim being heard all over Washington:

…only 1.9% of small businesses are in the top two tax brackets that would be affected.

Mr Drum apparently thinks the reader will conclude that this means an insignificant effect on small business job creation.  But this is fallacious reasoning.  It’s true that a small minority of business owners are in the over $200K bracket, about 10% according to IRS statistics from 2007, the latest available.   But these are the very businesses that can create the most jobs, because they have the most after tax profit to reinvest.

The important statistic is not what fraction of small businesses earn a lot but what fraction of the group being targeted for a tax hike is small businesses.  It turns out that most high income tax payers receive part or all of their income from business ownership.

Millions of small businesses are part time and/or employ nobody but the owner.  Millions more are just a bit larger, employing the owner plus one or two people.  Only a tiny  fraction of  those “very small” businesses will emerge as growing enterprises that create any jobs.

The small businesses that create most of the new jobs in America are the very ones the Democrats have targeted for tax increases, the businesses with enough profits left over after supporting the owners to reinvest in expansion and job creation.

Creating Jobs by Reinvesting After-Tax Profits

The businesses that will be hit by the tax increase are the larger “small businesses” that DO create jobs, such as construction, or restaurant, or technology  firms.  These businesses create new jobs by  reinvesting profits. Every dollar of increased taxation, is one less dollar available to reinvest in expansion and job creation.

The Bottom Line

• More small business expansion is funded by reinvesting after-tax profits than by borrowing.  Since the banking crisis began in 2008 small businesses have suffered dramatically reduced access to credit.  Therefore, after-tax profits are even more critical if they are to expand and hire more people.

• Government has no system to identify and count the jobs that won’t be created because of tax hikes on “the rich.”

• Government will seize from the private sector some of the resources that empower free people to use their liberty to create prosperity.  These resources will be used to support expanded political power and reward special interest constituencies with political connections.

This parody of The Talking Heads’ “Once in a Lifetime” deserves an Oscar for wit and clever animation.  If you’re an Obama-hype skeptic invest 3.5 minutes.  You won’t regret it!  (via Ann Althouse)

;;

“These are gigantic packages…and a lot of the people really involved don’t even know what’s inside the packages.”

Thirty Second Video

Vice President Biden blames lack of public approval on lack of public comprehension due to the size and complexity of Obama legislative packages.

As is his wont the Vice President makes an inadvertent admission.  “The people really involved” are the Senators and Congressmen who voted to enact these “gigantic packages.”  We, The People will have to suffer the consequences over many years as we, The President, The Vice President and the Senators and Congressmen who enacted “gigantic packages” learn by living through them what the consequences will be.

Most Americans know that most of the Senators and Congressmen who voted to enact thousand of pages of new law and changes to existing law in the ObamaCare bill, the energy bill, the recently enacted financial regulation bill and the $800 Billion Recovery Act (AKA “stimulus”) did not read them, and could not comprehend them if they did.

These bills are so “gigantic” and complex that it’s simply not possible to even consider all the consequences, even if one read every page.  Consider this one paragraph example from the Stimulus/Recovery Act about Transit Assistance.

To figure out what this means one would have to:

• read section 5302 of title 49, US Code to learn what kinds of grants are authorized, and
• Read section 5307 of Title 49, US Code to learn what types of grants 80% of the money is to be spent on, and
• Read subsections i, l,  and j to see what kinds of grants are prohibited, and
• Read section 5340 to learn how 10% of the funds are to be spent, and
• Read section 5311 to learn how the last 10% of funds are to be spent.

To be careful and thorough a Congressman should look into the historical performance of each of these grant programs to determine if they have been efficient and cost effective in the past.  Conscientious due diligence on just this one-half of one page could take a Senator and his staff a week to complete.

Each of Biden’s “gigantic packages” includes thousands of amendments to other laws and programs.

• Nobody in the Administration or Congress could possibly imagine all the potential consequences, intended, or unintended that could result.
• Nobody could possibly imagine all the ways changes in different, disparate programs could combine with changes in other programs to produce unanticipated consequences in the broader economy.
  

The Bottom Line

The best word to characterize enacting these “gigantic packages” without any way to understand the consequences is:

Negligence.

Liberty Works investigative reporter Nicki snapped this photo of the free market at work, liquidating surplus inventory of out-of-fashion products, at a rural gas station along Interstate 5 in Central California.

text

City officials in Los Angeles, San Francisco, and Sacramento have passed ordinances that seek to economically punish the people of Arizona for taking steps to stop a wave of violent crime.  Arizona’s new law empowers local police to identify illegal aliens and turn them over to federal immigration officials for deportation.

These California politicians apparently don’t know the law in their own state.

Here are excerpts from the California Penal Code Section 834B (emphasis added to highlight consistency with the new Arizona law).

With respect to any such person who is arrested, and suspected
of being present in the United States in violation of federal
immigration laws, every law enforcement agency shall do the
following:

(1) Attempt to verify the legal status of such person as a citizen
of the United States, an alien lawfully admitted as a permanent
resident, an alien lawfully admitted for a temporary period of time
or as an alien who is present in the United States in violation of
immigration laws.  The verification process may include, but shall not
be limited to, questioning the person regarding his or her date and
place of birth, and entry into the United States, and demanding
documentation to indicate his or her legal status.

(2) Notify the person of his or her apparent status as an alien
who is present in the United States in violation of federal
immigration laws and inform him or her that, apart from any criminal
justice proceedings, he or she must either obtain legal status or
leave the United States.

(3) Notify the Attorney General of California and the United
States Immigration and Naturalization Service of the apparent illegal
status and provide any additional information that may be requested
by any other public entity.

This law has been in effect in California for decades.

Conclusion:

There is nothing new or radical about local police enforcing federal law,  or state laws that are mirrors of federal law as is the case in Arizona.   What is new is the Democratic party’s strategy of deliberate non-enforcement of of the Southern border because they believe that policy will cause American citizens of Latino descent to vote against Republicans.

President Obama held a press event Tuesday to announce appointment of his new budget director.  His remarks included:

When we walked through the doors of the White House we not only faced the worst economic crisis since the great depression, we also faced a $1.3 Trillion deficit…

Thus, Obama once again tried to blame the previous Administration for titanic deficits he has deliberately created, in part with the failed $800 Billion “stimulus.”  He hopes we’ll all forget his stimulus hype back in the early days of his administration when he smugly mocked his adversaries for not understanding that massive government borrowing and spending would, somehow, “immediately jumpstart job creation.”

He hopes we’ll forget his famous speech to a meeting of Democratic Congressmen when he scorned those who warned against profligate borrowing and spending:

Then you get the argument that this is not a stimulus bill, this is a spending bill.  What do you think a stimulus is? [laughter]  That’s the whole point. [more laughter] no, seriously.  THAT’S THE POINT!

At the beginning of 2009 Obama enthusiastically urged Congress to borrow and spend with abandon.  When he was sworn in less than half of the $700 Billion TARP bailout fund had been loaned out to banks.  in the end almost all of it was repaid.  Obama could have used his authority to stop further TARP bailouts.  Instead he broke the law by expanding the TARP program to seize control of GM and Chrysler and GMAC.  He enacted the failed stimulus, Cash for Clunkers, expensive but failed foreclosure prevention programs, ridiculously extravagant subsidies for politically favored electric car, solar, wind and window companies.

But now Obama hopes to portray himself as the victim rather than the author of the deficit crisis. But if he had been serious about correcting the Bush deficits he campaigned against he certainly could have.

The charts above demonstrate one, easily implemented option: Obama could have cut the 2009 and 2010 deficits in half by simply putting Congress on an easily enforced budget.  Instead of driving massive increases in spending, he could have insisted that Congress cap all spending on all programs except Social Security at  the total that was spent in 2007.

Of course the politicians in Congress would have had to decide which of the scores of Unconstitutional, corrupt, wasteful programs to cut or eliminate in order to keep the total below the cap.  Those decisions are considered phenomenally difficult in Washington, but a committee of Main Street small business owners, who have no choice but to invoke budget discipline every day, could have instructed them.

Here are some hard numbers:

• When Obama was sworn in, January, 2009 total federal debt was $10.6 Trillion.
• Today, 18 months later, the debt totaled $13.2 Trillion
• If Obama and Congress had adopted the easily implemented cap illustrated in the charts above the debt today would be $11.6 Trillion.
• The interest on the difference, $1.6 Trillion, at current rates will be about $55 Billion per year.   To put that in perspective the entire annual cost of  the Department of Homeland Security is $52 Billion.
  

The Silver Lining

We first published this paragraph here, a week before President Obama was inaugurated:

There is one bright spot in all this dreary news: before the 2010 election it should be obvious, to even the most naive voters, that politicians, including the magnificent Barack Obama, are simply not equipped to improve America by diverting a Trillion dollars from the private sector and hurling it at politically inspired projects and programs.  With his grand plan Obama may demonstrate the value of liberty and the clumsy incompetence of political authority more effectively than any politician since Ronald Reagan.

On Tuesday the Justice Department filed a lawsuit against the state of Arizona in federal Court.

The legal brief discloses some facts about sloppy practices in the government’s immigration “system” that most Americans do not know, but would be outraged if they did.

Foreigners who are in the country legally are required to register with Department of Homeland Security (DHS) and are issued one of several forms of identification.  Federal law requires them to carry the I.D. with them at all times and to show it when asked by any law enforcement officer.

The legal brief filed by the Justice Department objects to the Arizona law provision that empowers local police to ask for ID cards issued to legal aliens by the government.  It says:

However, there are several circumstances in which an alien would not be provided with evidence of registration notwithstanding the federal government’s knowledge of the alien’s presence.  Federal law provides a variety of humanitarian options for aliens – including unlawfully present aliens – who have been victimized or fear persecution or violence, including but not limited to asylum, special visas for victims of trafficking, and special visas for victims of violent crime.  In order to qualify for such programs an alien needs to apply and satisfy the criteria that the program at issue requires.  During the pendency of the application process, an alien may not have evidence of registration even though the federal government is aware of the alien’s presence, has decided against removing the alien, and certainly has no interest in prosecuting the alien for a crime.

These humanitarian programs demonstrate that one aspect of federal immigration policy is to assist and welcome such victims in the United States, notwithstanding possible temporary unlawful presence.  It would therefore violate federal policy to prosecute or detain these types of aliens on the basis of their immigration status – which is often known to the federal government and, for affirmative policy reasons, not used as the basis for a removal proceeding or criminal prosecution.

Not mentioned here are other “humanitarian options” that tens of thousands of aliens apply for, including simple family connections.

Here the government admits that it deliberately allows many thousands – probably  hundreds of thousands – of illegals to stay here pending application for official permission to live here under one of several exceptions to the law.   Thus, there is a category of illegals that aren’t really illegal…but not legal either.

As the government’s own lawyers admit in this brief, it does not grant these people any officially legal status while they await adjudication of their applications, a process that often takes several years.  They are not given a visa or any identification.  But, they aren’t deported either.  They just dwell here, in limbo.

This raises obvious questions: Why can’t the government create an ID card, with an expiration date, and issue it to such people?  Why is the system so “lose?” Don’t expect any reasonable or logical answers from the Obama Administration.

Of the estimated 12 – 15 million illegals, how many have this status, both legal and illegal at the same time?  The most likely answer is that nobody knows because the bureaucracy is too dysfunctional to keep track

The long threatened suit was finally filed in federal court today by the Department of Justice.

For weeks President Obama and several Administration officials, have hysterically charged that the Arizona law would facilitate or require or permit racial profiling.  Yet profiling is not the grounds for this suit.  Much of the 25 page legal brief is an attempt to sell the court on the notion that federal immigration enforcement is a complex, delicately balanced ballet.  Here’s an example:

The nation’s immigration laws reflect a careful and considered balance of national law enforcement, foreign relations, and humanitarian interests…Because immigration control and management is a field where flexibility and the adaptation of the congressional policy to infinitely variable conditions constitute the essence of the program, Congress vested substantial discretion in the President and the administering federal agencies to adjust the balance of these multiple interests as appropriate – both globally and in individual cases.

According to the suit the state of Arizona would, by identifying illegals and turning them over to federal authorities for deportation, upset a balance “actually established by the federal government” between the various, competing goals.  Anyone who has interacted the U.S.  Bureau of Citizenship and Immigration Services, under the direction of the Department of Homeland Security(DHS),  knows it to be one of the most chaotic, dysfunctional bureaucracies in the world.  The notion that somewhere high level officials consider and “carefully balance” immigration policy is simply absurd.

The Legislators of Arizona passed their new law because the state is suffering a wave of violent crime committed by illegal aliens.  This suit says, in essence, that a vital component of the Obama Administration’s fragile “balance” is weak border enforcement and allowing hundreds of thousands of illegals to continue to live in Arizona.  If Arizona identifies illegals and turns them over to DHS for deportation there will be a lack of “balance.”

This is a weak case and the government is very likely to lose.  However there won’t be a court decision until after the election.  It seems obvious that the purpose of this suit  is to persuade Obama’s hard Left base that he “cares.”