Why do tax hikes hurt economies?

So government spending increases to pay for entitlement programs, and eventually taxes will be raised in order to pay for these programs. The problem with tax hikes is, that while revenues increase initially, in the long term governmental revenues decline. Why?

Well, it's quite simple actually. When taxes get up to 50, 60, or 70 percent, such as they were in 1920 after WWI, and the late fortys after the FDR spending spree, people start to find ways to get around paying taxes.

First of all, we must say here that some taxes are necessary for maintaining infrastructure, such as building and maintaining roads, bridges and tunels, and for building government buildings, and providing for national security. In order to pay for these things taxes are necessary.

Yet when the government starts to create programs to help people, taxes usually go up in order to pay for all these programs. According to the Laffer curve, as taxes are raised to a certain point governmental revenue increases. But once that certain point is reached (say it's 40%), then people start to find ways to get around paying them.

Henry Hazlitt, in his book "Economics in One Lesson, describes how people get around paying taxes.

1. Working less. Why work two jobs when all that's going to cause me to move into a higher tax bracket, forcing me to work eight months of the year making money for the government.

2. Spending less. If they are going to take half the money I make, then I'm going to put it in a bank and save rather than purchase material items, such as new TVs, iphones, vacations, etc.

4. Less risk taking. If they lose all their money when they lose, and get to keep only 30, 40, or 50% of what they make when they win, they decide that it is foolish to take risks with their capital. Making matters worse here is that capital available for risk taking decreases due to high taxes.

Since people with money are spending less, this creates less capital for those who create jobs. With less capital, and with less risk taking, this means fewer jobs created. In other words, "the government spenders create the very problem of unemployment that they profess to solve."

Warren G. Harding creates the roaring 20s

Warren G. Harding (1865-1923)
U.S. President (1921-1923)

In 1920 Warren Gamaliel. Harding was elected President amid a sharp depression. To fire up the economy, he signed into law a big tax cut, and became almost instantly popular.

He appeared to be the perfect fit to be president, as he was very good at making friends, keeping the peace, and speaking in public.  He was a very successful newspaper man and senator, and so it was only fitting that he would be an equally successful president.

He was a conservative, meaning he was a proponent of preserving traditional American values, and limiting the size and scope of government in order to allow businesses the freedom to grow and prosper. Nominated in an era where voters were tired of progressives who kept passing bills in an effort to perfect the world, Harding seemed the perfect fit to be president.

Prior to the progressive movement presidents admired and respected the Constitution, and believed it did not give the executive the power to solve the problems of individuals and businesses.  Yet this changed with the Woodrow Wilson administration when he signed into law regulations to improve conditions for laborers, to make sure products sold were safe for consumers, and to assure fair market conditions.

Such regulations were needed for a long time.  The problem was that once the dam broke, once Congressmen realized they could impede upon constitutional restraint in order to move forth their agenda, they went overboard by creating a bunch of laws that impeded upon personal liberties, such as the 16th amendment  that allowed Congress to levy taxes on individuals and corporations, and the 18th amendment prohibiting the sale of alcohol in 1920.

These amendments now made it possible for a progressive Congress to push forth their, which was to create a complete euphoric society where there were no poor, no war, no crime. Yet there was a price to pay for all these new regulations, and it was that they had to pay fore them.  S

So nearly as as soon as the 16th amendment was signed in 1913 by Woodrow Wilson Congress swiftly acted by passing the Revenue Act of 1913, which lowered the basic tariff from 40-25%, and, to make up for lost revenue, re-instated the federal income tax.

By 1920 the top marginal income tax had risen 73 percent, and this was done mainly to pay off the war debt.  Following the Great War the economy spun into a sharp decline, resulting in the depression of 1920 and 1921.  During this time the gross domestic product plunged 24 percent, from $91.5 billion in 1920 to $69.6 billion in 1921.  Unemployment jumped from 2.1 percent in 1920 to 4.9 percent in 1921.

Yet this depression is often forgotten mainly because it was so short lived, and because of the Great Depression.  It was short lived because Warren G. Harding, lead by his brilliant secretary of treasury, former banker Andrew Mellon, had a vision that the tax rate was so high, and spending so out of control, that it was preventing the economy from growing.

Mellon and Harding wanted to return America to pre-progressive times when the president did not impede upon individual and business freedom.  They believed doing so greatly benefit the American economic system and American morale. 

The first thing they succeeded at doing was cutting spending by 50 percent. This made it so that government did not need to take as much money from individuals and corporations to pay for government run programs.  The next task for Harding and Mellon was to get a significant tax cut through Congress.  

On April 11, 1921, Harding called for an extraordinary session of Congress to revise the federal revenue and tariff laws. There were some who called for significant tax cuts, although others noted the ongoing expenses of paying off debt accrued during WW1. Ultimately, a bill was signed by Harding to cut the top marginal tax rate from 74 to 58 percent.

Unfortunately for Harding, he had hired some of his best friends to posts in his administration, and, as it turned out, they were wheeling and dealing behind his back. One of the great scandals that brought down the Harding Administration was the Teapot Dome Scandal, where his “friends” got rich selling oil that was supposed to be set aside for public use.

Half way through his second year in office he died of what was initially recorded as a stroke, although historians later determined that he probably had a heart attack.  He had been suffering from high blood pressure and chest pain for quite some time, and he failed to heed the advice of his physicians. However, there were also rumors swirling that he killed himself  because he couldn't face the fact that he had let the public down. There were also rumors that he may have been murdered.  Yet no evidence of foul play ever appears. 

Either way, he was still a very popular president at the time of his death.  Yet once word got out about all the scandals the populace became angered and his popularity plummeted.   Most historians, therefore, judge Harding as one of the worst presidents because he failed to hire good enough people to posts in his administration.  

Still, because of his economic vision to reboot the American economy, as he lay dying on August 2, 1923, voters were very happy with him.  In fact, the people loved Warren G. Harding. 

Here's why everyone should pay taxes, even the poor

I've always been a believer that if Congress wants U.S. Citizens to pay taxes that we should all pay the same percentage, regardless of how much we make.  Call it a flat tax or whatever you want, but that's what I believe.

The reason I think a flat tax would be good for everyone is because it would put an end to the class warfare.  The reason I think this would be good is because it would make it so that every American had a stake in what that money was spent on.  It would make it so all people would care how our tax dollars were spent.

I mean, think about it.  If you don't pay taxes, why would you care where that money went? Why would you care if taxes went up on the rich, or the middle class, if you don't pay taxes? Well, the obvious answer should be love of country before love of yourself, but I'd imagine personal selfishness, or ignorance due to lack of interest, might also serve as useful answers here.

With 52 percent of Americans no longer paying taxes, that means that more than half of U.S. citizens have no stake in how tax dollars are spent.  If we had a flat tax, 100% would have a stake.  In other words, a flat tax would make it so that we were all in it together, and it would end the class warfare, something that began in 1913 with the 16th amendment.

I'm not necessarily proposing a flat tax, but I think everyone should pay something into the system, if there is going to be taxes at all.  Even if it's $10 a year, or even $5.

I am, however, proposing an end to the progressive tax system.  I think that all it does is punish people for making more money.  About seven years ago I took on a second job as an asthma writer for healthcentral.com, and my wife wanted me to quit because it made it so our income tax return was reduced.  Actually, there was fear we would have to pay in.

So, there really is no incentive to take on a second job.  I do this one because I love it more so than for the money.

My point is, the progressive tax system is a deterrent to making more money, because doing so may put you into a new tax bracket, resulting in you paying more taxes.  A flat tax would end that.  A flat tax would make it so if you made $50 you'd pay, let me make up a rate, say it's 15%.  So you would pay $5 in taxes.

And, if you got a good job with benefits and made $50,000 a year, you would pay $7,500 in taxes.  Now, of course there could still be tax breaks for families, and tax breaks if you make under a certain amount of money, and stuff like that.

Since people will no longer be thrown into a new tax bracket as they make more money, there would be an incentive for everyone to move up the ladder, so to speak. As more people do this, then the government would make more money in the long run anyway.

But the idea is that we would all pay taxes, and therefore all have a stake in the system; an incentive to care; an incentive to vote for candidates who champion for a responsible government.