Good news. The intellectual battle for liberty is partly won. In the New York Times, David Leonhardt concedes that piling up a massive national debt is a disaster. “This debt,” Leonhardt writes, “will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.”
Bravo! And it is fair and proper for Mr. Leonhardt to fault the Bush administration for finding new ways to take from taxpayers to give to special-interest groups, such as the elderly (prescription-drug benefit). Republican earmarks alone, during the twelve years it controlled Congress, numbered almost 15,000.
Two things are missing in Leonhardt’s thoughtful analysis. First is a recognition that much of the Obama spending so far is a quantitative leap beyond that attempted by President Bush. Yes, we had a stimulus package under Bush, but Obama’s was five times greater. And the auto bailouts and socialized medicine, which were not seen in the Bush administration, are coming with a ten-figure price tag. The deficit in Obama’s first year in office alone may well exceed the deficit for the entire eight years of Bush’s presidency.
Second, we need some reality therapy on the subject of taxes. Raising tax rates often does not mean revenue is raised, and tax hikes are often followed by a collapse in revenue. This is an essential point of public policy, and we now have overpowering historical evidence to support it. When Leonhardt says that tax cuts “not only continue to cost the government but have also increased interest rates” he is in error. In fact, cutting current tax rates on income, corporations, and capital gains might be the shrewdest move President Obama could make to slash both the national debt and unemployment.
Why? Because entrepreneurs invest more when they get to keep more, and invest less when they get to keep less. In 2003, the Republicans cut the tax rates on income (39.6 to 35 percent), capital gains (20 to 15 percent), and dividends (39.6 to 15 percent). As a result, as Stephen Moore points out, “tax revenue increased by an enormous $785 billion, the largest four-year increase in revenue in American history.”
What Mr. Leonhardt might applaud even more is that most of this windfall came from rich people. From 2003 to 2006, the amount of federal revenue received from millionaires doubled, and the revenue from people worth $5 million or more almost tripled. What we need to do is create more millionaires, not chase them away through higher taxes (as we did under President Carter in the 1970s). In a similar vein, according to the Congressional Budget Office, revenue from capital gains increased 70 percent.
President Obama has proposed hikes in both the income and the capital gains taxes. “We have to be able to say that we are going to at once raise taxes on some people and lower taxes on others,” the president asserts. It’s a matter of fairness. But how fair is it that 1 percent of taxpayers already pay 40 percent of all income taxes, and how helpful is it to recently unemployed Americans if entrepreneurs decide not to hire more employees because of prohibitive tax rates? The U.S. corporate income tax, for example, is already one of the highest in the world and is chasing investors overseas, where they can earn profits instead of losses.
No nation in history has ever taxed itself or spent itself into prosperity. But by slashing tax rates in the 1920s and 1980s, we saw the U.S. turn double-digit unemployment into 4 percent unemployment and rapid growth in our GDP. When we give people more freedom to pursue their vision of success, they often create opportunities for others to fulfill their dreams. Massive hikes in federal debt and in tax rates will choke a recovery.