Wednesday, August 5, 2009

Pump Primining is Nonsense..... Tax Reform is What's Needed

To hear our Representatives in Washington and their economic guru's talk, the economy works like a pump, which they have been busy priming with large amounts of government spending, courtesy of taxpayer canteens. Their theory is that once they have primed the pump sufficiently business activity will flow and end the current economic drought.

This kind of thinking betrays Congress's ignorance of the working of both pumps and the economy. The mere act of priming a pump does nothing to produce the desired outcome, a greater supply of water. Using a lot of water to prime a pump when only a small amount is necessary is wasteful and does not pay off in an increase in the amount of water produced. What really creates the flow of water is the effort of the individual who forces the pump handle down, then up, and down once more.

Whether pumping water or increasing economic activity, it's really all about the individual and his effort. We should be doing everything we can to encourage this effort, but instead our government is hell bent on doing just the opposite. The return an individual receives from his efforts is his incentive, and is being reduced year after year, with the government taking a greater share of his production. The unwieldy mess that our current tax system has become discourages those who would generate the increased economic activity we need.

The greater the number of buckets an individual pumps from the well, the less he is allowed to keep from each additional bucket. If increased economic activity is the goal then our tax system is backwards. The first bucket or two pumped are the easiest of the day and also have the lowest tax cost to the individual. Our progressive income tax that takes a bigger share of each additional bucket , discourages the individual precisely at the point that an incentive to produce more is needed. The basic premise embodied in the tax code says the harder you work the less you get to keep! If that is not a system rigged to stifle production, what is?

Hiring additional employees to help increase one's output has it's own code of discouragement. Let's start with the sponge of a tax called Social Security; it soaks up 15% or so of each and every bucket you fill. If the Democrats have their way with health care and you're a small business you can count on losing another 8% to pay for the government run health insurance plan. That's almost a quarter of every bucket gone before you've even had a chance to wet your beak.

That's just for starters, if you're not discouraged yet there is still the progressive income tax structure which will sop up another 35+% of what's left in your bucket today, and 40+% after the Bush tax cuts expire in 2010. That is unless the various surtaxes that have been proposed are imposed, draining even more from YOUR BUCKET. That's without considering State, County and local income taxes, which with very few exceptions are on the rise. That will mop up more of what is left from your day at the well .

The biggest problem our Nation faces is the government's never ending thirst for a greater share of your labor and mine. While the rest of the world lowers tax rates making them more competitive, our leaders are constantly finding news ways to make you and I less competitive through higher taxes that discourage production.

We need to scrap the Tax on Labor, that we refer to as the Social Security Tax, all together. The tax money that Washington takes from us is fungible; it doesn't matter what label they put on it. It's no secret that Social Security receipts in excess of Social Security payments are spent as soon as they are collected on other items in the government's budget. There should be only one low, flat rate income tax, spread over the broadest base possible, to encourage a revival of economic activity.

Competing in the global marketplace of the 21st Century will require us to either attract the necessary capital or cut wages to be competitive. Only one of those alternatives produces rising incomes for American workers. Yet the Policies to make the US a country that is capital friendly are nowhere to be found. The anti capital accumulation tax called the capital gains tax should be yanked from the tax code. Doing so will ensure that capital will once again be in greater supply relative to labor, and will result in rising wages and providing the higher standard of living all working people seek.

In order for the US to once again become the low tax, high wage economic juggernaut of the past, something's got to give. That something is run away government spending. Lowering the Tax rate and making the base as broad as possible will give everyone an incentive to help their representatives in government understand what is a good use of taxpayer money and what is not. Just as Congress is now getting an earful from the folks who aren't enamored with the Government Health Care Option. The kind of political push back they are sure to receive, once all working citizens have an interest in how their tax money is being spent, will make it easy to chop a trillion or two from an insanely bloated Federal Budget and then restrain it's growth after that.

1 comment:

Anonymous said...

Once again Dave, you said it all.
I would only add tort reform and term limits and we would be on the road to recovery for real.

Dave McAdams
Midwest Aviation Consulting, LLC