Economic Fallacies Concerning Tax Cuts and Government Spending

by | Dec 21, 2010

I copied down what some clown on TV said about our debt to China: “Someone in Beijing is laughing as the U.S. goes deeper into debt to pay for the tax cut.” Where to begin? Well, the following is basically the order in which I hurriedly wrote down my comments when I heard that. 1. […]

I copied down what some clown on TV said about our debt to China: “Someone in Beijing is laughing as the U.S. goes deeper into debt to pay for the tax cut.”

Where to begin? Well, the following is basically the order in which I hurriedly wrote down my comments when I heard that.

1. Small potatoes: there is no “tax cut.” Congress lowered the tax rates in 2001 and 2003. So the now-extended tax schedule is the same one that has been in place for 7 to 9 years. The taxes on the productive are immoral and even in practical terms way too high.

The “cut” is simply the fact that taxes won’t be raised even higher.

2. No one “pays” tax cuts. We’re not having a cut, but if we were, it would mean only that the government did not take from you as much as leftists would like it to. That may disappoint power-lusters, who were looking forward to beating up more on the producers, but there is no “payment.”

The twisted notion that someone has to “pay” for tax cuts reflects pure communism: the premise that the government owns all the wealth of the nation. On this premise, any money the government doesn’t receive is viewed as money taken away from it. In other words, every dollar you get to keep is a dollar the government has to “pay.”

3. The extension of the current rates is not in itself a good thing.

Since government spending is not being cut, but is being fervently expanded, on Keynesian principles, the government faces a shortfall of funds. This deficit has to be financed by some other form of looting–either increased borrowing or ramping up the printing presses. They get you coming or going, so lower taxes wouldn’t mean you keep more of what you earned.

But in leaving the tax rates unchanged, the current legislation does represent a victory: it frustrates the desire of the left to raise rates on “the rich.” The fact that these man-haters were unable to raise taxes just on “the rich” is an encouraging demonstration of the power of the Tea Party movement and of the resiliency of the American “sense of life.”

What matters morally and symbolically is how flat the tax rate is, not the total amount of revenue it brings in.

A modest proposal would be that we enact a *declining* tax rate, on the premise that one man’s wealth-creation benefits all. Anyone making over $1 million a year has done so much for the national standard of living, that income above that figure should not be taxed at all. (On the other hand, those making, say, $30,000 a year are doing next to nothing for the rest of us and are the biggest consumers of government loot.) It is a disgrace that the poor are not taxed. It is obscene that the most productive members of society are taxed at a *higher* rate, punishing them for their virtue.

(Of course, ultimately, all taxation has to be abolished. See “Government Financing in a Free Society,” in Ayn Rand’s The Virtue of Selfishness.)

4. Getting back to the opening quote: it’s phrased in terms of this guy in Beijing who’s laughing. First, isn’t that an appeal to xenophobia? Second, look at the fantastic inversion here: a creditor is delighted that the loan he holds may be worthless?! “Ha, ha–I loaned the Americans a ton of money and it looks like they’ll never be able to pay me back! Oh, for joy!”

This is the same mentality that came up with the oxymoron: “predatory lending.” It seems never to occur to these geniuses that a lender wants to get his money back.

That fellow in Beijing is not laughing, he’s sobbing.

5. Spending is the looting. I never get tired of repeating that. All the government can do is seize some people’s goods and transfer them into the hands of others. Forget taxation. Forget the deficit.

All that matters is how much the government spends–i.e., how many goods and services it robs from the productive. The specific means employed in the robbery–whether it is by extortion (taxation) or fraud (inflation) or a combination of both (increased sale of government bonds)–is of only minor import. Our motto has to be:

Stop the looting.

Dr. Binswanger, a longtime associate of Ayn Rand, is an professor of philosophy at the Objectivist Academic Center of the Ayn Rand Institute. He is the author of How We Know: Epistemology on an Objectivist Foundation and is the creator of The Ayn Rand Lexicon: Objectivism from A to Z. Dr. Binswanger blogs at HBLetter.com (HBL)--an email list for Objectivists for discussing philosophic and cultural issues. A free trial is available at: HBLetter.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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