Sunday, February 1, 2009

Truer Words Were Never Spoken

But it Takes More than Rhetoric to Lead a Country!

“Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories, in tax sold farms , in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions from wages, in increased cost of what they buy, or as now in broad unemployment through out the land. There is not an unemployed man, there is not a struggling farmer, whose interest in this subject is not direct and vital. It comes home to everyone of us.”

This guy or gal knew their stuff! They nailed it! They knew that higher taxes act as a wedge, increasing the price of goods and services. They saw that as this wedge increased, it pushed buyers and sellers further apart until transactions that normally would have been concluded, failed. They saw that the solution to unemployment and idle factories was to reduce the burden that government had placed on business by reducing taxes. They saw that this would inure to everyone's benefit.

Who was the great man or woman who spoke these words? Was it Ronald Reagan or Margaret Thatcher? No. You say it had to be someone with a much better grasp of how to solve the economic problems we are encountering. If you are guessing Barack Obama, you're still wrong. I'll give you all the guesses you want and you'll never guess who spoke these words and when, so I might as well tell you. First, lets talk a little bit about the idea behind these words .

This wasn't an original thought on his or her part, it was something he or she had learned from someone before him or her. People knew the burden that taxes and regulations placed on the individual, so who was it that imparted such wisdom on him? Was it the Chinese Philosopher Confucius who lived 2,400 years before him? When confronted with similar problems, Confucius had said nearly the same thing. A US President and a Chinese philosopher on the same economic page? I can't believe it, you say. Here is how Confucius did say it:

Duke Ai asked asked Yu Zo : It has been a year of famine and there are not enough revenues to run the state. What should I do ?

Zo said “ Why can't you use a 10 percent tax?

The Duke answered : I can't even get by on a 20 percent tax, how am I going to do it on 10 percent?

Zo said , “If the people have enough what Prince can be in want? If the people are in want how can the Prince be satisfied”

- Analects of Confucius (12:9)

Maybe it came from the works of the 14th Century Muslim philosopher, scholar and economist IBN-Khaldun, who wrote the following about taxes and regulations:

In the early stages of the state , taxes are light in their incidence , but fetch in a large revenue; in the later stages the incidence of taxation increases while the aggregate revenue falls off. Now where taxes and impost are light, private individuals are encouraged to engage actively in business: enterprise develops, because men feel it worth their while, in view of the small share of their profits which they have to give up in the form of taxation. And as business prospers ... the total yield of taxation grows. From this you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation

Perhaps the writings of Jean-Baptiste Say,were the origin of his thinking :

A tax is not productive to the public exchequer in the proportion to it's ratio[rate] ... it had become sort of apothegm, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury.

Were it not almost self evident, this principle might be illustrated by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to it's own interests.

The idea may have been copied from another President, who saw it as a way to increase production after the end of the war. Here is what he said :

An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if if the rewards of such action are very largely taken away by taxation. If we had a tax whereby on the 1st working day the government took 5 percent of your wages, on the second day 10 percent, on the third day 20 percent, on the fourth day 30 percent, on the fifth day 50 percent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?

No, it wasn't Richard Nixon. He was all about higher taxes and price controls (regulation). I was there and can tell you it didn't work. Those words were spoken by Calvin Coolidge as a way to reinvigorate the economy in 1924.

Okay, it must have been learned from Art Laffer, who along with Robert Mundell and Jude Wanniski resuscitated Classical Economics in the 1970's and provided the intellectual underpinnings of the Reagan Revolution, right? Wrong! Here is a hint: When these words were spoken Art Laffer hadn't been born yet. But here is what Arthur Laffer did say about taxes:

The theory is simply saying that at these higher tax rates (“in the prohibitive range”) there is a disincentive to make more money, which will result in lower revenues from taxes. In the end, it's really all about incentives to work, invest, take risks and earn money.

Sorry for dragging this out, but I wanted to show you what thousands of years of economic history have taught us: low taxes and moderate regulations are what enable economies to thrive. The person who espoused the ideas in the first quote that excessive taxes hurt the economy probably didn't learn them from anyone I have quoted. This idea was self evident worldwide until 1932, when the person who spoke these words betrayed their very ideals and went on to pursue the greatest expansion of government through increased taxation and regulation that this country had ever seen. That fellow, you might now have guessed, was Franklin D Roosevelt, who knew what to do, but didn't!

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