Politics & Policy

Tax Cuts in The Age of Katrina

Louisiana and Mississippi more than ever need to turn away from elite opinion.

In the aftermath of the death and destruction wrought by Hurricane Katrina, the New York Times editorial page opined that if President Bush and “his Republican congressional leaders want to deal responsibly with a historic disaster of this scale, they must finally try the path of honestly shared national sacrifice.” Sacrifice in the Times’s parlance is a delay of “upper-bracket tax cuts for the least needy.” About the planned congressional vote on estate-tax repeal, the same Times editorial noted that Sen. Mary Landrieu (D., La.), a potential swing vote, now “has higher priorities.” According to Senate Minority Leader Harry Reid (D., Nev.), a vote to repeal the tax “doesn’t look right” at present.

#ad#Majority Leader Bill Frist (R., Tenn.) has promised to hold a vote on the estate tax as soon as possible. Those presently suffering in Louisiana and Mississippi should hope he does, and that the Republicans also have the courage to make permanent the 2003 Bush tax cuts. Despite warnings from the left, economic growth is the single best cure for what ails Mississippi and Louisiana.

A common misconception about the rebirth of Germany and Japan post-WWII is that aid under the U.S. Marshall Plan led the recoveries in each nation. In truth, according to a study by George Mason professor Tyler Cowen, the “German Miracle” actually began with tax cuts, before money from the United States arrived.

In 1948, German citizens making above $600 were in the 50 percent tax bracket, and those making above $15,000 were in the 95 percent bracket. By 1954, the threshold to reach the 50 percent bracket was an income of $42,000, and the 63 percent top tax bracket was reached at $250,000. Economic growth and government revenues took off amidst Germany’s feverish tax cutting. In Japan, tax cuts (while not always marginal rate cuts) occurred every year from 1950 into the 1970s on personal and/or business income. Up from the rubble, Japan’s GDP rose from $16 billion in 1952 to $300 billion in 1972. By 1974, Japanese government revenues were $63 billion, four times Japan’s total GDP in 1952.

Returning to the U.S. and Hurricane Katrina, as history has shown repeatedly around the world, no amount of federal aid or charity will fix Louisiana and Mississippi. The “fix” in both states will result from the arrival of audacious, and yes, self-interested entrepreneurs eager to make money in return for rebuilding the blighted areas in both states.

Federal income taxes should be kept down so that the cost of entrepreneurship is kept to a minimum. The estate tax should be repealed so that capital presently used to enrich lawyers, accountants, and insurance brokers can be freed up in the form of investment to fund the massive rebuilding efforts.

Importantly, Louisiana and Mississippi also need to look inward. West of Louisiana is the state of Texas and its zero percent income-tax rate; north of Mississippi is Tennessee and its zero percent income-tax rate. Louisiana and Mississippi, meanwhile, charge their most productive citizens 6 percent and 5 percent respectively for the privilege to work within their borders. This won’t do if either plans to recover quickly. Workers, in the end, are capital, and the most productive workers are truly valuable capital.

Rather than heed the call of the New York Times for austerity and “sacrifice,” Louisiana and Mississippi more than ever need to turn away from elite opinion and do that which is necessary to attract the most and best workers to rebuild their states. They should make it clear that effective effort will not be punished and cut taxes as much as possible.

John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.

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