George Rebane
[This is the linked transcript of my regular KVMR commentary which was broadcast on 18 January 2013.]
OK, the so-called New Year’s fiscal cliff has been avoided, and now it seems that the national hysteria over the Newtown shootings is on the ebb. We may be able to return our attention to the awesome and real problem that faces our country and every American, whether they are paying attention or not. That problem is the amount of our debt and unfunded obligations that is beyond the ken of the overwhelming fraction of our citizens.
Washington’s dominant elites are in terminal denial about the problem and its impact. Their solution to the mounting annual deficits, that have now grown to trillion dollar monstrosities, is the Big Lie – raise taxes on the rich and cut military spending, and all is well. The tax rises were supposed to have been handled by Obama’s fiscal cliff victory legislation. Don’t believe a word of it. It took less than two weeks for the opening drums to begin beating for raising more taxes on everyone – including the formerly sacrosanct middle class. Why? Because that’s where the money is.
But today things are so bad that taxes cannot be raised high enough to dent the debt. Entitlements and transfer payment spending must also be drastically cut. Problem is that there’s not a single Democrat who will acknowledge that, even while their own Congressional Budget Office is pointing out the obvious arithmetic involved. Instead, we will attempt ‘solutions’ that involve even higher taxes and more regulations to stifle freedoms and economic growth. In short, we are hell bent headed for the now defunct European model. The WSJ reports that –
“Europe’s vaunted social model has struggled to generate growth or jobs for decades. Prior to the creation of the euro, national governments masked this problem with a combination of deficit spending and devaluation. The borrowed money would help pay for generous welfare benefits for those driven out of work by inflexible labor-market rules and economic stagnation. Currency devaluation would ease the burden of all that borrowing by allowing governments to pay back debt with devalued lire and francs while offering a short-term boost to wage-cost competitiveness. … But there remains no clear consensus, at least outside Germany, that the European way of welfare itself is bankrupt, that it never worked as well as its defenders pretended, and what we’re witnessing is the coming due of all the checks kited over decades to keep it afloat.”
Here in the US our average marginal tax rate is already 40% according to the Federal Reserve that is now starting to mumble concerns about economic growth. Research by Ohanian, Raffo, and Rogerson concludes that raising tax rates any higher will “significantly reduce US economic activity” while providing minimal increase in government revenues. In short, that cow won’t milk any more.
In California, when we combine all federal and state taxes, the highest marginal tax rates are at 60% – that means that you’ll keep only 40 cents out of every dollar earned when deciding to work one more hour or make the next investment.
Given these tax rates, Prescott and Ohanian tell us that “The incentive to produce goods for the market is particularly depressed when tax revenue is returned to households either as government transfers or transfers-in-kind—such as public schooling, police and fire protection, food stamps, and health care—that substitute for private consumption.”
Prescott and Ohanian tell us that “Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.”
Given that we will have higher taxes and more burdensome regulations, like Dodd-Frank and from Obamacare, that misdirect capital to unproductive areas, “the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.”
We end with a candid observation from Democratic Party Chairman Howard Dean, “this may seem like heresy (but) the truth is, everybody needs to pay more taxes, not just the rich.”
My name is Rebane, and I expand on this and related themes on georgerebane.com where the linked transcript of this commentary is posted, and where such issues are debated extensively. However these views are not necessarily shared by KVMR. Thank you for listening.
rebanesruminations.com 
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