Tuesday, October 31, 2017

The Road to Egalitarian Serfdom

Update: As it happens, my good friend Dan Mitchell today published a piece on his blog that is highly relevant for this article. See inserted link below.
I appreciate all the inquiries about subjects for this blog that I get from all you readers out there! I do my very best to keep up with them and work them into my own schedule of topics to write about. Please keep your suggestions coming.

Today's article addresses one of those reader suggestions. Some leftist activist has put together a video about "trickle down tax cuts" that apparently has gotten a lot of attention in Wyoming news media. The video, which you can see here, is almost humorous in its unashamed bias and lack of substance, but we obviously cannot respond to it at that level. Unfortunately, bad information is sometimes elevated to a point where it is taken seriously. 

The overall message in this video is two-fold:

a) a cut in the corporate income tax is a cut in taxes "for the rich"; and
b) the only way to make life better for the American people is to grow the welfare state by leaps and bounds.

In other words, government is the driver of economic growth. Before we get into the details of this message, let us briefly note a couple of facts from our economic history. 

The most important prosperity driver in Western Civilization was not an expansion of government. It was the invention of the modern art of government, more specifically a government that respects the individual as a sovereign entity, and that provides an accountable legal framework for private businesses. Both these functions of government imply the balance between power (including the power to tax) over the people and accountability before the people. 

In short: the government envisioned by our Founding Fathers. 

A government that stands accountable to the same degree as it exercises power, was a novelty in the 16th and 17th centuries, but it rapidly gained support and eventually caused such historic transformations as the British and French revolutions. Especially the latter was - initially - a leap forward for individual and economic freedom. (Like most violent revolutions, it spun out of control after a while.) Yet the intellectual legacy that had been built up since the Renaissance was powerful enough to transform Western societies, establish individual and economic freedom as societal pillars and to give birth to the greatest nation on Earth - ours. 

The common denominator in the history of Western Civilization since the 15th century has been a gradual move away from big, controlling government. The term "laissez-faire" has a pragmatic yet highly symbolic role in this: at one point the French King Louis XIV asked a group of businessmen what he could to do help them thrive. The answer was simple:

"Laissez-nous faire."

Let us go about our business without government regulations. It worked - until the aristocracy wanted to hold on to its big government hard enough to suppress the liberating forces of economic freedom and individual pursuit of happiness. 

This move from big, intrusive and authoritarian government continued all the way into the early 20th century. As a result, the West rose from abject poverty and a daily fight for survival to a life with conveniences that include indoor plumbing, instant communications, comfortable housing, clean and reliable access to food and health care, and so on. The modern industrialized lifestyle is entirely the work of thriving capitalism.

In the late 19th century, a statist counter-revolution began. It spread its tentacles across Europe and reached across the Atlantic in the early 20th century. After a while, it took a peaceful form we know as the egalitarian welfare state, with a benevolent face opf economic redistribution and a slowly tightening chokehold of taxes on the forces of freedom and prosperity. First, Europe descended into economic stagnation, then the United States began exhibiting the same ailments under the egalitarian project we know as the War on Poverty.

Here, we get closer to the realities of what this anti-tax cuts video is all about. As I explain in my two books, there is overwhelming evidence, both from academic research and in the public policy literature, that a slowly but relentlessly expanding welfare state equally slowly but relentlessly brings a growing free-market economy to a halt. This has happened in Europe - over there, growth rates of two percent are celebrated as if they just put a man on Mars - and it is happening here as well. If we do not start rolling back our welfare state, the three-something percent GDP growth spurt we have seen this year will fade away and we will drift back into the two-percent range again.

One of the endemic problems with the egalitarian welfare-state project is that it always comes with progressive, highly redistributive taxes. The theory behind these tax systems is that by punishing people for making a lot of money, and by providing low-income families with more than they earn, government will level out the standard of living. This is the essence of egalitarianism: the end goal - as I demonstrate in my latest book - is a society where there are no economic differences between individual citizens. 

Egalitarians never worry about the fact that economic growth suffers under highly redistributive taxation. It has even come to the point - which I cover in detail in my book - where they argue that economic growth is of no consequence; all that matters is economic redistribution. Senator Bernie Sanders was the most prominent, but far from only, advocate of this very irresponsible argument. 

In order to make their point, the egalitarians behind the "trickle down" video try to suggest that a cut in the corporate tax will only lead to enrichment of corporate CEOs. They try to correlate tax breaks for big corporations with stock buy-backs and CEO compensation hikes. There are three problems with this argument:

1. They suggest that stock buy-backs and stock rallies have only happened when government give tax breaks to big businesses. This is patently untrue; all you need to refute this point is to take a look at the Dow Jones Industrial Average over the past 40 years, or so. In other words, they have cherry-picked their facts with microscopic precision, carefully ignoring everything that even hints in the opposite direction of their argument.
2. It is true that corporate CEO compensation depends heavily on the stock-market performance of the company they are in charge of. One big reason for this is that the tax on high incomes is much more punitive than the tax on stock dividends and capital gains. In other words, if egalitarians agreed to lower the taxes on high personal income, we would quickly see a shift in CEO pay from stock-based compensation to salary-based compensation.
3. The evidence that high corporate income taxes hurt businesses is overwhelming. Dan Mitchell makes a strong case here; other than that, let me just refer to an article in the US News and World Report, hardly a right-wing extremist publication:
California, which boasts one of the most burdensome state tax systems, has witnessed companies relocate at an accelerating pace. In 2011, companies moved out of California at an average of about five a week. Altron Inc., an information technology company laid off 74 employs to open headquarters in South Carolina. CGI Federal Inc. fired 170 people to move to Canada. Petco, the well-known supplies retailer, shut down its headquarters in San Diego to move to Texas. The list goes on and on.
More recently, Toyota moved its North American headquarters out of high-tax California to business-friendly Texas. One if left wondering what the state of California is going to do to replace the tax revenue that all exiting businesses no longer pay them. 

This question is not irrelevant. On the contrary, the "trickle down" video suggests that the only way to grow the economy is to spend more money through government, for example on universal, single-payer health care. 

A government-run health care system would require approximately $1.5 trillion in higher taxes. Egalitarians, ignoring the relation between taxes and economic growth, often argue that this will be compensated for by the fact that businesses and individuals no longer have to pay for private health insurance. What they ignore - carefully and deliberately - is the fact that countries with single-payer health care systems have enormous problems with rationing. The situation is so bad in the Scandinavian countries that businesses buy private health care for key employees on the side of, and in addition to the cost of, the government-run health care system. 

On top of the pain and suffering that people have to go through while waiting a year for knee replacement surgery, or being denied life-saving treatment based on QALY estimates, single-payer systems come with repugnant moral problems. Again with reference to my new book, more specifically Chapter 5 on Fiscal Eugenics, life itself is demoted to a budget item under socialized medicine. A person is deemed unfit for the government budget that pays for health care if he, over the course of his life, cannot be expected to pay enough in taxes to make up for the cost of the health care he needs. 

Euthanasia and abortions become instruments of budget control. 

The overarching problem for the egalitarian argument is that the more they expand their government and their promises of redistributive entitlements, the more their taxes will slow down the economy that pays for it all. Since they refuse to acknowledge the importance of growth, they do not see that when the economy grinds to a halt, the need for entitlements accelerates while the stream of tax revenue stagnates. This forces them to make increasingly tough priority decisions, pinning one entitlement against another. They will have to choose to make cuts to health care to avoid cuts in education; they have to cut education to avoid cuts in welfare; they have to cut welfare in order to avoid cuts in paid-leave programs; and they cut paid-leave programs to avoid cuts in health care.

It all becomes a downward spiral where budget cuts and higher taxes turn into a self-propelling fiscal decline. Welfare state after welfare state are pushed down the austerity ladder, from Denmark to Sweden to Ireland to Italy to Spain to Portugal to Greece. 

As austerity efforts have sent the economies of these countries into a tailspin (see my 2014 book Industrial Poverty for a detailed account of these episodes, and more), the people who really suffer, whose lives are destroyed, are those to whom government made the most promises. The end station of the egalitarian argument in the "trickle down" video is Greece, a country that has lost one quarter of its economy, two thirds of its business investments, and whose youth unemployment rate has averaged 50 percent for almost a decade now (five times higher than it ever was here in the United States during the 2009-2012 bottom of the Great Recession).

Some of the price tags for the egalitarian over-reach in Greece, from 2009 to 2014:

-Old age pensions cut by 7.5 percent;
-Benefits for families cut by 14.8 percent;
-Benefits for the disabled cut by 17.9 percent;
-Unemployment benefits cut by 43.5 percent;
-Sick leave and health benefits cut by 45.8 percent;
-Housing benefits cut by 99 percent.

Government spending on dentists, under the single-payer system, cut by 58.5 percent;
Cuts to general hospitals, 36.9 percent, and to specialized hospitals, 43.5 percent;
Cuts in pharmaceutical benefits for low-income families, 36.3 percent;
Cuts in budgets for mental health facilities, 18.4 percent. 

And so on.

During the same period of time, taxes have gone up dramatically. For example, the income tax rate on a 40,000-euro income ($46,600) was 30 percent in 2009. Today it is 45 percent. In total, taxes have gone up from 39 percent of GDP in 2009 to 50 percent of GDP in 2016. 

And they still had to make all these cuts to government promises. 

The entire austerity assault on the Greek economy is, in my humble view, borderline criminal. It has destroyed the lives of millions upon millions of people, and there is a good chance Greece will never recover (they certainly won't do it under the burden of the welfare state). Yet the Greek experiment is the inevitable end-station of the egalitarian train. Once the forces of prosperity are shackled hard enough by the chains of redistribution, it is only a matter of time before the economy reaches the Greek downslope. 

Plain and simple: the road to egalitarianism is the road to serfdom. 

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