GROWTH TRUMPS TAXES EVERY TIME
One of the most frustrating economic fallacies is the recurring belief that raising taxes raises government revenue. Throughout history this belief has been proven false over and over, yet a substantial number of politicians and everyday citizens still continue to promote these terrible ideas.
Taxes and regulations deal with basic math (1+1 = 2), but people always have a difficult time understanding growth's escalating equations (1+1 = 3, 4, or 5). For instance, the Congressional Budget Office (CBO) easily calculates the federal revenue to be generated from a simple tax hike, but they are always billions, if not trillions, of dollars off calculating the actual results because they have no accurate models which project the effects on business, both positive and negative. Remember that the CBO is staffed with government economists and accountants who have never run a real company and who have never made a Friday payroll. As you notice a theme in JAM Views, we must realize that the great majority of the people who we blindly follow because of their authoritarian position, likely have no idea what they are doing. They are, just like the rest of us, trying to figure it out one day at a time.
Here's one recent example. The 2008-2016 Administration's tax increases were projected by the CBO to increase federal revenue by $650 billion over the following ten years. Yet, because the increased taxes and regulations slammed the brakes on the economy, by the end of this Administration's term it was estimated that federal tax revenue would actually be CUT by $3 Trillion over the same ten years. That is a 5X error in the opposite direction! Now a trillion here and a trillion there, and soon we will be talking about some real money!
Americans work on multipliers. If you prefer taxes and regulations, you should try opening a new business in France, and then enjoy even more trying to get the government to let you fire the employee who decided to never show up for work! We must understand growth and multipliers. One tax dollar redistributed into an entitlement program equals one dollar. But one tax dollar spent on defense, on private companies rebuilding our nation's infrastructure, or on manufacturing jobs turns into three or four dollars in our economy. And when we say manufacturing, most of us picture Rudy coming back to the steel mill in his blue hard hat to hand his dad the letter of acceptance to Notre Dame, but we need to also picture Intel engineers in their white clean room suits, biomedical scientists, and 3-D printing manufacturers.
Let's review a few numbers. An extra 1% growth in our country's Gross Domestic Product (GDP), which is our "company's total revenue," adds ANOTHER 1.2 million jobs. Higher taxes cut jobs 100% of the time. Increased taxes can only produce a fraction of the government revenue that 1% more growth creates.
Here's another example. In the seven years prior to President Reagan entering office, GDP grew an average of +2.5% per year. President Reagan then cut taxes and regulations, and the GDP growth nearly doubled over the rest of his presidency, with government tax revenues growing double-digits in 4 of the last 6 years he was in office - huge numbers for Government receipts.
Unfortunately, for nearly two decades now we have been brainwashed to believe that growth is over and the "new normal" is under 2% growth. From 1947 to 2001 our GDP growth averaged +3.5% per year, but from 2002 to 2016 we averaged only +1.9% (a 45% drop). The C-Players rolled out numerous excuses, to include aging baby boomers and lower labor force participation rates. But these are only smoke screens meant to confuse and misdirect us. These excuses are analogous to the mediocre CEO telling shareholders that it's okay that sales were down this year due to bad weather, fickle consumers, or supply chain hiccups. But the A-Player owners, you educated citizens, know that slow growth has a simple cause and effect relationship with raised taxes, regulations, huge debt service, and the refusal to reign in entitlements.
Econ 101 demands, "If you're not growing, you are dying." Or, as Red proclaims in the movie Shawshank Redemption, "Get busy living, or get busy dying!" Raising taxes and creating more government bureaucracy in hopes of achieving a beautiful worldview always creates the opposite result. We must think growth. Teach your friends and kids about multipliers. Then very soon when someone recalls that ridiculous phrase "new normal" we will all laugh, toast, and ask, "What were we thinking?!"
"Work only on things that will make a great deal of difference if you succeed." - Peter Drucker