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Wednesday, October 21, 2020

Apologists For Joe Biden’s Tax Proposals Miss The Point

“Every four years a Democrat runs for president on a platform that includes higher taxes for the wealthy. And every four years a group of people predicts that the sky will fall if those plans are implemented. Yet every time their plans have been implemented, the sky hasn’t fallen.” Those are the words of Harvard professor Jason Furman, who was Chairman of the White House Council of Economic Advisers during Barack Obama’s second presidential term.

Furman is right. It’s never made sense that Republicans would cry “recession” every time a Democrat would promise tax increases. This isn’t to defend tax increases. Rest assured this write-up will not.

Still, Republicans vandalize the word “recession” when they say tax cuts will automatically cause them. Painful as they are, recessions have historically signaled an economy on the mend. During boom periods, it’s only natural that lenders will reach a bit in terms of loans, investment bankers will perhaps let their guards down somewhat in terms of the businesses they’ll finance, and businesses will, with continued growth in mind, reach in terms of new business lines and new hires.

As the great Howard Marks has long explained it, the seeds of bad times are planted during the good, and vice versa. Recessions signal a painful, but necessary cleansing of what’s not working. That’s why, when politicians let recessions happen untouched, boom times always follow. During the bad times, changes are made that set the stage for much better in the future.

Republicans also get it incorrect in automatically assuming a higher rate of taxation will cause the enterprising to work less on the way to slower growth. Once again, this is in no way a defense of higher tax rates. The deeply held view here is that taxes are way too high, and they’re particularly too high on what Furman and fellow Democrats would deem the “wealthy.”

At the same time, it’s hard to argue, assuming implementation of the higher tax rates desired by Joe Biden, that the enterprising will cease working, or even work less. Think about it. For the richest among us, work itself is the reward. It reinforces their individual brilliance. They couldn’t not work. Does anyone think Jeff Bezos would retire if Bernie Sanders were elected president? Not very likely. Bezos loves what he does. So do most rich Republicans. Work is the reward. Which is all a way of saying that Republicans would be wise not to abandon their pursuit of tax cuts, but to instead improve their argument in favor of them.  

They could start by talking about the immorality of a tax code that singles individuals out solely because they earn a lot. George Will once made a case against the death penalty for the ability to put someone to death imbuing government with too much majesty. So true. Government is meant to serve us. Let’s not elevate it by giving it the power to kill people.

In much the same way, let’s not elevate government by giving it the power to choose who will and will not be favored. The present federal tax code is a monument to favoritism, which means the perception of majesty within Congress and the White House has spun out of control. Let’s reduce taxes on the rich because it’s not the place of congressmen, senators and presidents to pick winners and losers.

After that, it’s worth pointing out that Bezos’s love of his work only tells part of the taxation story. While it’s surely arguable that the willingness of the enterprising to work is unaffected by income tax rates, the ability of the enterprising to innovate is surely impacted by tax rates. Think about it.

While some entrepreneurs and CEOs can’t get enough of what they do, it cannot be stressed enough that there are no entrepreneurs and no businesses without savings. This simple truth is what Furman leaves out in his defense of soaking the rich.

While it won’t cause economic activity to grind to a halt as alarmist Republicans claim, higher taxes on the rich logically shrink the amount of capital available for the businesses of today and tomorrow. No economic school can get around this truth.

Investment returns are the remuneration of abstinence. Translated, unspent wealth is what makes it possible for workaholics like Bezos to turn their visions into reality. It’s a reminder that the rich are easily the most important drivers of economic progress precisely because they’re rich. Since they are, they have the most wealth left over to direct to higher uses after fulfilling their various consumptive desires. Tax them, and you shrink the availability of capital for businesses and entrepreneurs.

Furman also points to some kind of economic model that has calculated higher wages as a consequence of Biden’s tax plan. Here Furman mistakes causation. And he ignores the unseen.

While it’s certainly possible wages could rise despite a proposed 39.6% top rate under Biden, the higher wages wouldn’t be a direct consequence of higher tax rates. That’s the case because wages are a function of investment, and higher taxes certainly wouldn’t in isolation boost total investment.

Furman might point to soaring job growth during Bill Clinton’s presidency to support his contention, but such an argument would leave out how the Clinton Treasury’s support of a stable dollar during the 1990s rendered investment quite a bit more attractive. It would also ignore how the growth of the federal government itself was somewhat restrained after the Republicans took over Congress in 1994.

Considering the Clinton years, it’s not unreasonable to suggest job growth would have been even greater if taxes on the rich had never been increased. Same with Biden. Assuming the Penn model is correct, it’s illogical to assume wages wouldn’t soar even more assuming Biden signed legislation pushing the top tax rate down to 19.6.

It’s all a way of saying Biden partisans miss the point about taxes. But so do Republicans at times. They do because they gloss over the basic truth that tax cuts are their own reward for them signaling more freedom. In short, Republicans should be for tax cuts just because. If so, the growth will take care of itself. Grow is what free people do.

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