A Trojan Horse
What sounds more reasonable than a mix of "revenue enhancements" and spending cuts to resolve the nation's debt crisis? Nothing, as long as there is a Tooth Fairy. The problem with this proposal -- in fact any proposal other than taking money away from Washington -- is that in the long term it reduces the wealth of the nation. This works just like your bank account or your credit card.
As a consumer you want the highest interest rates possible for your bank account or the lowest rates possible for your credit card. We seek this because of the miracle of compound interest. A small amount of money set aside will grow to a large amount of money because of the miracle compound interest.
Unless politicians have a Tooth Fairy their revenue enhancements reduce the economy's rate of growth. It is a small amount, but nevertheless it does reduce economic growth. Because that growth is compounded these revenue enhancements will reduce the wealth available to our children and grandchildren.
Within this reasonable sounding trial balloon are Trojan Horse tax increases that will harm future generations. Those future generations did not cause these problems and therefore it is immoral to punish them.
Politicians Are Irresponsible
We are in this financial mess because politicians are irresponsible, and spent beyond the country's means. Sadly, we the citizens did not watch them as we should have done.
The Founding Fathers understood that politicians would do such things and therefore crafted a system that limited the role of the federal government in our lives. Here is what James Madison wrote about the role of the central government in Federalist Paper #45: "The powers delegated by the proposed Constitution to the federal government, are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement, and prosperity of the State."
It is very clear upon reading these words by the Father of the Constitution that entitlements, Social Security and other such programs, which "concern the lives, liberties, and properties of the people" are reserved to the States ... they are off limits, therefore, to the federal government. It is constitutionally correct to dismantle these programs at the federal level and devolve them to the state.
Unless we do this it will be as Bastiat wrote in 1850 "It will not be long before the public finances reach a state of complete disorder. How could it be otherwise when the state is responsible for furnishing everything to everybody? The people will be crushed under the burden of taxes; loan after loan will be floated; after having drained the present, the state will devour the future" These words, which are eerily similar to our situation today are based upon what happens when government begins to giveaway wealth to people who don't produce. (see Bastiat Selected Essays Chapter 4)
The irresponsible behavior of the Washington politicians have put this nation at risk and they have proven they can't be trusted with the people's money. It is therefore important for citizens to engage and demand solutions that will work.
The Miracle of Compound Interest and the Economy
As an argument for sustaining bloated government politicians say that we can't afford a tax cut. Excuse me! That money belongs to the people and not you. You are not cutting taxes at all; you are allowing the people to keep more of what they've earned. We the People are going to starve this beast, and the Washington elite will learn to live with it.
Citizens must demand a reduction in taxes AND that the Congress bring the budget into balance. The total revenue to the government is the product of the tax rate and the size of the economy. This is important to understand and so it is illustrated with an example. The economy today is about $14 trillion and the tax rates is about 20%. Therefore revenue to the government from taxes is roughly $2.8 trillion dollars. If the economy was twice as large at $28 trillion and the tax rate was 10% the revenue to the government would be exactly the same $2.8 trillion.
When tax rates are cut it is true that for some period of time revenue to the government is reduced. However, with that tax rate reduction the economy begins to grow more rapidly and over a period of time revenue to the government will catch up.
If we were to reduce tax rates AND begin to reduce the size of government in a few years there would be more wealth in the economy and the government would have just as much revenue even with the lower rates. The following charts illustrate what this would look like. For this scenario tax rates were reduced over a 10-year period until government (all levels) spent 1/2 of what it now spends in terms of GDP. The real problems and economy are more complex than this simple model, but it does illustrate that cutting taxes and the size of government is the way to solve our fiscal problems.
In the short run revenue to the government falls below the levels that it would be at if taxes were higher. Soon, however, a booming economy makes it up. This is illustrated in the following two charts of GDP Size and then Government Revenue. With low tax rates the economy booms, it creates prosperity, and people will have jobs. Everything is positive with growth; growth comes with less government burden.
From 2050 to 2075 is the time frame that the chattering class says will be the most difficult for the country. But the following charts illustrate what can happen when we starve the beast and get our fiscal house in order. There is a gusher of money and this will solve the revenue problems. Moreover, liberty is restored, the nation has plenty of wealth, and the people will have the resources to tackle their own problems.
Conclusion
We must not be confused by all of the political gobbledygook we are going to hear. Our path forward is clear -- we must starve the beast. There will be some short term pain, and it is going to take some shared sacrifice to get through it. However, We the People caused this problem and it is our job to clean up the mess, even if it means adding a few politicians to the unemployment roles.
Think about the future, and demand that Congress cut the taxes and cut the spending even more.
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