“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Monday, April 18, 2011

Two Important WSJ Editorials by Alan Reynolds & Phil Gramm

In two editions of the Wall Street Journal late last week, Alan Reynolds and Phil Gramm provided key insights into why Wonderboy's proposed tax policies and overall tax-and-regulatory programs of since he took office in 2009 are bound to fail in reviving the US economy and placing it on a sound footing for long term, non-inflationary growth.

Reynolds, whose sensible pieces on tax policies may be found under posts on my companion business blog under his name, wrote that,

"Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP- 8% and 18%, respectively- regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP."

The 18% figure which Reynolds cites is supported by David Ranson's WSJ editorial from May of last year, in which he refers to "Hauser's Law." That is his term for the nearly-constant relationship of federal taxes collected being a near-constant 19% of GDP.

Reynold's recent editorial is worth reading for the wealth of detail he provides on behalf of his argument. It's very convincing.

Further, as he notes, "rich" has been defined, or dumbed, down to only the $250K and up level. It's sounds, as Reynolds quotes the First Rookie, impressive to say "trillions of dollars in....tax cuts that went to every millionaire and billionaire in the country."

But we've all read pieces dissecting how a real family of 3-4 with an income of between $250-300K is far from "rich," never mind very, very far from being "millionaires."

What I take away from Reynolds' excellent piece is the continuing confusion, whether deliberate or the result of genuine economic illiteracy by the administration's and Congressional Democrats, is that incomes associated with specific tax rates, total taxes paid, and taxes as a percentage of GDP, are all quite different.

Regardless of rates being moved up or down, over time, personal income tax filers generally pay about 8% of US GDP. Raising rates won't change this because the economic behavior of people, and economies, are extremely sensitive to tax policies. Taxes are not a static arithmetic product of incomes and new, higher tax rates.

Phil Gramm, also a trained economist, and former Texas Senator, makes a different, but equally important point in his editorial entitled The Obama Growth Discount.

Gramm provides a simple Gordian-style analysis of the relative changes in economic situation from Carter to Reagan and, again, from pre-Obama to Obama.

Gramm's point is that,

"A compelling case can be made that Reagan's tax cuts, Social Security reforms, regulatory reforms, and limits on the growth and power of the federal government not only helped the economy shake off the malaise of the 1970s but generated an economic growth premium that bore dividends for Americans until 2007."

Like Reynolds, Gramm provides a wealth of statistics to support his contention.

He then observes the federal government's actions under the current administration, concluding,

"Whether in absolute or relative terms, whether in comparison to our own experience or the performance of our competitors, America's wealth-producing ability has been diminished.....Big government costs more than higher taxes. It is paid for with diminished freedom and less opportunity. You can't have unlimited opportunity and unlimited government."

It's a simple but powerful insight. And, with Reynolds' reminder that Americans can really only afford some 18-19% of GDP as tax revenues, Gramm's points explain why our current economic 'recovery' has been so anemic. It's not a Reagan-style recovery, but a much more limited, stifled one.

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