Taxes not hiked; Women, minorities hit hardest

“There is a time when a politician must put politics aside,” said the passionate Democratic Congressman John Lewis of Georgia, once a famous civil rights activist. “There is a time when we must stand up and meet our moral obligation as servants of the people. . . . In this bill, you cut off the orphaned, the old, the poor, the weak, and the sick!”

Lewis, railing against a bill he denounced as “unjust” and “shameful,” sounded like a preacher describing Hellfire and Damnation. He nearly reached the point of screaming as he warned that the bill in question “drives millions of our citizens into financial despair! . . . Where is the mercy?” he bellowed. “Where is the compassion? Where is the fairness?”

Perhaps the bill in question was a measure to empty the checking accounts of middle class workers and give the proceeds to oil executives. Or perhaps it was a new program that herds poor people out of their homes and into concentration camps in Alaska.

Well, not exactly.

Tax Policy 101

The really offensive portion of the bill (which did pass both houses) was actually an extension of two small tax cuts enacted in 2003 on capital gains and dividends. Not to say that the capital gains and dividend tax rates will now decrease — rather, this bill simply makes them remain constant for two more years, until 2010.

Imagine, all this hype and drama over a tax non-increase measured at $14 billion per year for five years — a paltry sum in federal budget terms.

Given the level of ignorance by Lewis and many of his Democratic colleagues last week, it seems appropriate to try to educate them about supply side tax policy — so consider this my effort. The idea, at its core, is to avoid creating such a government drag on the economy as to distort or substantially reduce the incentives to invest and produce.

Capital gains and dividend tax rates — the ones in this bill that “drives millions of our citizens into financial despair!” — are key to job creation. Each dollar the government siphons away from investors is a dollar that cannot be used to create new businesses or jobs, or increase domestic production of goods or services that people want. It is irrelevant that the initial tax savings go to people with high incomes — the real benefit is that every penny will be spared from the Congressional Incinerator and will instead be reinvested in the private sector.

The underlying assumption of supply side tax policy is that investors and consumers — rational actors in the economy — always allocate societal resources more efficiently than the government.

Consider the underpinnings of this assumption. When an entrepreneur senses genuine demand for a product, he invests in its creation or continuation. Because he is taking a big risk with his own money, he does his homework and weighs his decision carefully and dispassionately. As numerous investors do this simultaneously, taking various levels of risk in various markets, winners and losers emerge based on consumer demand. Companies that serve genuine wants and needs efficiently will thrive, others will die. This is the picture of prosperity — investors pool their money and create businesses and jobs that supply a product for a real market demand.

Congress, by contrast, allocates societal resources based mostly on non-economic considerations, and it does so with other people’s money. Congressmen and senators weigh their re-election prospects and the desires of their committee chairmen and party leaders. Compromises and deals are made — backs are scratched, zeroes are added and removed from figures in the middle of the night based on the persuasion of million-dollar lawyer-lobbyists. The result? Counterproductive subsidy regimes, government contracts for cronies, and unnecessary construction projects such as the famous “bridge to nowhere.”

Even in the exceptionally rare case where the government tries to meet market demand, the private sector would do it better. Governments are good at providing necessary evils — military and police to keep evildoers under control, firemen to stop the carelessness of others from destroying whole city blocks, and enforcement of contracts where dishonest dealers try to shirk their duties. But they are not known for using money wisely.

Misconceptions

Democrats are wrong about taxes because they make several faulty assumptions about economics. For example, when the colorful Rep. Pete Stark (D-Calif.) declares that the preservation of investor tax cuts “wastes $70 billion on millionaires that could be used to improve people’s lives,” it is probably because he thinks that most rich people stuff their money into mattresses. We can disabuse him of that mistaken impression right now: those rich people didn’t get rich by acting stupid with their money. Their $70 billion will be reinvested in businesses that will create jobs for his constituents.

The friendly Rep. Jim McDermott (D-Wash.) says that investor tax cuts disproportionately help the wealthiest among us, and that “the rest of America is forced to choose between filling the gas tank and putting food in the refrigerator.” But we in “the rest of America” have jobs, and will keep working and seeing our 401(k) plans build value because a bunch of wealthy fat-cat investors have put their money into our companies, instead of having it taken away by the government.

And a note to all the bums and lobbyists who are depending on me to keep working and supporting them — no need to worry. Thanks to the Republicans in Congress, there is no correlation anymore between what the government takes in and what it spends. Your handouts are safe.

David Freddoso, a native of Indiana, is a political reporter for Evans and Novak Inside Report.