The Politics of Fear

Well understanding how fear, as a powerful motivating force, can induce irrationality in the arena of public sentiment and public policy, President Franklin Roosevelt famously declared in his first inaugural address, “We have nothing to fear but fear itself.”

Indeed, America has seen some rather infamous manifestations of this when, for example, Roosevelt himself ordered the internment of Japanese-Americans during World War II, and with two so-called Red Scares—one shortly after the Russian Revolution, in which President Woodrow Wilson imprisoned Americans for their political beliefs, and then another after World War II, in which the House Committee on Un-American Activities and the committees of Senator Joseph McCarthy imagined widespread Communist infiltration of the United States government and sought to ruin the lives of so-called “Communist sympathizers” and anyone associated with them.

Of course, fear in the arena of politics is not always irrational. Those conscientious Germans who feared the rise of Nazism were certainly justified. A fear that our federal government will be unable to implement a more sustainable fiscal policy before a damaging fiscal crisis occurs is not without some foundation either. But among politicians, the peddlers of fear are very often unconcerned with informed and rational conviction. They just want to win. So they seek to exploit fear that can be induced by deception.

Fear is very often a product of uncertainty and, particularly when accompanied by its companion—loathing—a product of ignorance or misunderstanding. Politicians and political advocates of all stripes routinely make exaggerated claims and use quotes or data out of context to incite conviction for their cause among constituents who lack a comprehensive understanding of the issues at hand. They not only induce fear of the effects of alternative points of view through subtle or even not so subtle deception, they often succeed in demonizing the advocates of those alternative points of view. Once a political figure is sufficiently demonized, people are apt to fear and believe that they are capable of a multitude of evils.

All Americans, whether they may tilt to the political Left or the political Right, are vulnerable to the politics of fear. It can be said that those on the Left tend to fear corporate greed and malfeasance, overpopulation, global warming, pollution, government intrusion into personal matters, war or an unwarranted use of military force, and the agricultural use of pesticides, hormones and genetic engineering. It shouldn’t be suggested that these things are not important and should not be of concern, but there is little doubt that their pernicious effects can be exaggerated, resulting in irrational fear among some.

On the Right, fear resulting from uncertainty, or fear of uncertainty itself (or at least an uneasiness with uncertainty), may be an integral part of what induces one to lean to the Right to begin with.  A Stanford University social psychology study, encompassing some fifty years of data and published in 2003, concluded as much:

We regard political conservatism as an ideological belief system that is significantly (but not completely) related to motivational concerns having to do with the psychological management of uncertainty and fear. Specifically, the avoidance of uncertainty (and the striving for certainty) may be particularly tied to one core dimension of conservative thought, resistance to change. Similarly, concerns with fear and threat may be linked to the second core dimension of conservatism, endorsement of inequality.

By “endorsement of inequality,” the authors appear to have merely meant that conservative thought is in acceptance of inequality as the necessary price to pay for the preservation of its perceived natural order of society.

We might easily dismiss such a study as the psychobabble of liberal university professors, but we need not look very far to see that many on the Right quite readily respond to the politics of fear. We certainly cannot assume that everyone who holds conservative political views does so as a result of fear. There are some very practical and principled reasons to hold conservative views. Nevertheless, we can find quite an abundance of behavior and convictions motivated by fear on the Right.

Have you ever wondered why all of those purveyors of minted gold coins as an “investment against inflation” find such fertile ground on Fox News and on AM (conservative) Talk Radio? While such coins might be fun to collect, they are a horrible investment. These proprietors are capitalizing on an underlying fear that the economy might suddenly collapse and/or that run-away inflation will ensue (particularly with that “socialist” Obama at the helm). On these venues, Glenn Beck in particular has been a successful merchant of the fear of economic collapse and massive inflation.

Among those on the Right, we also find fears of government intrusion into our businesses and societal or religious choices, government incompetence, very competent government wickedness (ironically), socialism (being asked to contribute to the benefit of undeserving people), illegal immigrants, foreign invasion or subversion, the U.N. and the possibility of a one-world-government (villainous black helicopters and such), drones, religious persecution, losing one’s cultural or religious identity (the so-called Culture Wars), gun confiscation, crime, men of other races, homosexuals and gay marriage, sharia law (this danger appears greatest in the state of Oklahoma), Common Core, and the possibility that President Obama is a socialist, Muslim, or even the Anti-Christ. If you find yourself on mailing lists resulting from having given to Republican campaigns, you’ll likely see emails from a variety purveyors of survivalist supplies taking advantage of fearful and gullible people. One need only have a couple of Right-leaning friends or family members who forward circulating emails to witness a pervasive sentiment of impending doom resulting from the deceitful and nefarious motives of President Obama and the Left.

It is little wonder then, that when the Democrats and President Obama passed comprehensive (very voluminous and perhaps too complicated) healthcare reform without any support from Republicans, the political opposition had little trouble in instilling fear of the law’s allegedly pernicious provisions. After all, they say, the law provides for “government run” healthcare and includes “death panels,” an assault on Medicare, forced participation, a “job-killing” burden on the nation’s businesses, and will result in reduced care and greater costs for us all.

Ironically, given the fervor of their rhetoric as they endeavor to repeal the law before its implementation, perhaps what Republicans fear most is that people will discover that there wasn’t really all that much to fear after all.

The Telling Politics of the Individual Mandate

For some time I have been intending to write about how partisanship affects the way we think—how partisanship corrupts fair minded and sound reasoning. There is a great deal to consider on that subject. Numerous factors can be cited as contributing to the partisan divide that has increasingly afflicted our country—the hardening of ideological stances that inhibits those who get caught up in partisan thinking from being able to appreciate any merit at all in opposing points of view. I simply have not yet had the time to construct a comprehensive essay on the subject. Given the great passion that has recently ensued from the Supreme Court’s decision concerning the individual mandate included in the Affordable Care Act (“Obamacare”), however, I thought I would go ahead and write of that one example—a prime example of how partisanship distorts perception.

It is pretty widely understood that those of us who pay property taxes and who pay for our own health insurance are, in doing so, also paying for the medical care of those citizens who have no health insurance. Through our property taxes we pay to support the county hospital district that treats the uninsured for free, and hospitals tell us that much of the cost of treating the uninsured is also passed along to those individuals and insurance companies who pay for medical services. In 1989, as part of an insurance reform proposal, the Heritage Foundation (a conservative think tank) proposed a solution to what they called this “free rider” problem. Their plan, named “Assuring Affordable Health Care for All Americans,” included a suggestion to “mandate all households to obtain adequate insurance.” The proposal was fully consistent with the politically conservative principle of citizens not being imposed upon to support other citizens who can reasonably support themselves. As Mitt Romney would later describe it to reporters in 2005 when he proposed that it be enacted as law in Massachusetts, “It’s the ultimate conservative idea, which is that people have a responsibility for their own care, and that they don’t look to government … if they can afford to take care of themselves.”

After that initial 1989 call for an individual mandate, the idea then became part of a number of conservative and Republican proposals for insurance reform, including one that was developed at the request of the H.W. Bush administration in 1991, but was never acted upon. When Hillary Clinton spearheaded an effort to achieve universal healthcare coverage in 1992 and 1993, Republicans in congress responded with various alternative proposals, all of which included an individual mandate. A bill called the “Health Equity and Access Reform Today Act” was introduced in the Senate by Republican John Chafee of Rhode Island and co-sponsored by Minority Leader Bob Dole and 18 other Republican Senators. The bill called for health insurance vouchers for low-income individuals, along with a mandate that all capable individuals buy their own health insurance. As House Minority Leader at the time, Newt Gingrich strongly endorsed the mandate. Of course Gingrich has been a vocal supporter of an individual mandate until only very recently, when a run for the presidency and a new political dynamic prompted a change of heart.

Republican proposals in response to so-called “Hillarycare” were met with skepticism by Democrats. Democrats were particularly opposed to the individual mandate, which they saw as a “giveaway” to insurance companies. Rather than seriously consider the merits of the mandate and incorporate it into a bi-partisan healthcare reform effort, Democrats were evidently blinded by partisan thinking and assumed, by default, that Republicans were once again simply trying to protect the interests of big business—in this case, the insurance companies—at the expense of ordinary citizens. As a result of that partisan divide, the Clintons’ efforts to enact reform and ensure universal coverage failed.

Here’s where it begins to get interesting.

As a candidate for president in 2008, Barack Obama repeatedly denounced the individual mandate, which, by then, Hillary Clinton had adopted as a part of her campaign’s healthcare proposal. One of his campaign mailers explained, “The way Hillary Clinton’s healthcare plan covers everyone is to have the government force uninsured people to buy insurance, even if they can’t afford it. … Punishing families who can’t afford healthcare to begin with just doesn’t make sense.” As candidates usually do, Obama mischaracterized Clinton’s proposal and offered no alternative of his own that would ensure universal coverage.

By some accounts, Obama’s attitude toward an individual mandate began to change as soon as he had secured his party’s nomination for the 2008 election. In any case, he didn’t have to reverse himself publicly when reform was being crafted because all of the proposals were originating in the House and Senate. It was concluded that the mandate was an important component of any proposal that could realistically ensure universal coverage, other than a government-run single payer system. And since it was a Republican idea to begin with, it was thought that its inclusion would help to ensure Republican support for reform.

It turned out, however, that reforming our nation’s insurance and healthcare delivery systems is very complicated business, and therefore, an easy target for political posturing and propaganda. There are a number of reasons why the “Affordable Care Act” lost the support of all Republicans in Congress and perhaps a few of them are good reasons. The particulars of the legislation are far too voluminous and complicated to get into here (and they are not the point of this writing anyway). But perhaps what is most interesting, and rather telling, is how attitudes completely changed regarding the individual mandate to buy health insurance.

By the time the “Affordable Healthcare Act” or “Obamacare” was enacted, the individual mandate had evolved from a soundly conservative idea espousing personal responsibility to, in the minds of many, a typically liberal, “nanny state” idea espousing an obtrusive government and less freedom for us all. Since the healthcare law had been enacted solely by Democratic members of Congress at the urging of President Obama (which can perhaps be blamed, at least in part, on Obama and the Democrats), it became, especially for those who live exclusively in the partisan world of the FOX News culture, a clear example of a horrible abuse of power by politicians who have no regard for personal liberty and the Constitution. Since virtually every other component of “Obamacare” is rather popular among the public, the individual mandate became the primary focus of attack. When partisanship fully takes hold, simply winning for the sake of the tribe takes precedence over truth or principle.  As a result, ironically, Republicans put themselves in the position of, contrary to everything they believe, defending the right of a few citizens to sponge off of the rest of us.

That’s what partisan thinking can do.

When the Affordable care Act was enacted, President Obama and the Democrats insisted that the sanction for those who didn’t buy health insurance was a penalty, not a tax.  They didn’t want to be accused of raising taxes. They well understood that even though the penalty (or tax) would be imposed only on those who neglected to buy health insurance and would likely lower everyone’s healthcare costs, political opponents could rather easily mischaracterize it for political gain.  (They understood this because that’s the way the game is played in politics, and, make no mistake, Democrats do the very same thing all the time.)  Just as Chief Justice John Roberts aptly pointed out, however, regardless of what politicians might call it, if it looks like a duck, walks like a duck, quacks like a duck, and flies like a duck… well… it’s a tax.  After the Supreme Court’s ruling, we have seen that the Democrat’s concern was well founded.  Since, when the tribalism of partisanship takes hold, winning elections is more important than principle or sound public policy, Republicans have now accused Obama and the Democrats of perpetrating a huge tax increase on the middle class.  Naturally, we are expected to overlook the fact that the tax is imposed only on those whom the Heritage Foundation and Republicans had for many years called “free riders,” and partisans undoubtedly will.

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As a side note: Since the Supreme Court has now declared that the government can penalize us for not buying health insurance, many have worried that the government can tell us anything about our personal lives—make us buy and eat broccoli, for example. Keep in mind that we still have the 14th Amendment that, according to a long line of precedents made by the Court, ensures that we have a right to privacy. The government cannot tell us to eat broccoli or how we should wear our hair because those are private matters. Whether or not we buy health insurance is not a private matter, on the other hand, because such a decision ultimately affects everybody else.

Of course eating broccoli (or green vegetables in general) is good for our health and some may argue, therefore, in the general public interest. There will always be such judgments to make. That’s why we have a Supreme Court that is, by design, insulated from partisan pressures and, at least theoretically, resistant to partisan thinking.

The Trouble With the Two Parties

Here are a couple of good essays on how the two parties have gone off the rails—one by a Republican on what has happened to the Republican Party here, and one by a Democrat on what has happened to the Democratic Party here.  Both essays appeared in New York magazine’s  November 2011 edition.

Why Not A Flat Tax?

What could be more fair than a flat-rate income tax? All citizens would be taxed at the same rate—no special treatment for anyone. Such a system is progressive in that, the more one earns, the more tax they pay. And those who are unemployed would pay nothing until they are able to find work (unlike with sales or “value added” taxes).

Some flat-tax plans are even more progressive. Such plans exempt income below a specified level, allowing the very lowest income earners to avoid paying any tax at all.  Such an exemption increases the progressive nature of the system all the up the income scale too.  For example, with a 20 percent flat rate and a $20,000 exemption, someone making $20,000 per year would pay no tax, while someone making $40,000 would pay tax at a rate of 10 percent, those making $80,000…15 percent, $200,000…18 percent, $5 million…19.92 percent, and those bringing in $20 million per year would pay tax at a rate of 19.98 percent.  It’s progressive.

Is it progressive enough?  What are the considerations that need to be addressed in determining whether such a flat tax is fair to all citizens and prudent for the health and wellbeing of our economy and our society?  Here are a few.

Social Justice

One might ask why should we not simply let nature take its course—let freedom and the free enterprise system do what it does best. That is, reward those who work hard and those who, through their own initiative and ingenuity, realize the highest incomes. Our free enterprise system, because it rewards hard work and ingenuity, is the most efficient and productive economic system the world has ever devised.  We certainly wouldn’t want to compromise the economic system that has enabled the United States to become the most prosperous nation in history.

But of course, while free enterprise has been the primary engine that has produced American prosperity, it has not been an unfettered free enterprise.  It has not been the kind of laissez-faire economic system that operates on the principle of “survival of the fittest,” with utter indifference to those who do not succeed and prosper. There are two reasons why we do not subscribe to a simple laissez-faire economic system. One has to do with practical economics, as we will see momentarily. The other reason concerns American principles of social justice.

In his first draft of our Declaration of Independence, Thomas Jefferson described the principle “that all men are created equal” as a “sacred” truth.  (It was the impious Benjamin Franklin who urged the substitution of “self-evident” for “sacred.”)  It had not escaped Jefferson’s attention that, in fact, men possess quite a wide range of physicality, intellect, initiative, and moral aptitude.  He simply meant that, since all men are created by God, we are all equal in the possession of a common humanity, and that natural law, therefore, dictates that everyone is entitled to the same inherent rights.  The notion that we are all “equal in the possession of a common humanity” also suggests, just as Christianity and other religions teach us, that we have a responsibility to our fellow human beings—a duty to see to it that everyone is given an equitable chance to live freely and prosper.

This does not mean, of course, that everyone should be guaranteed an equal financial outcome. Rather, it prescribes that we have an obligation to see to it that everyone has as equitable a chance to get ahead, relative to other citizens, as can be practically ensured. Unbiased formulation of tax policy, therefore, demands that we consider the advantages that higher incomes and wealth provide in the quest for greater prosperity relative to lower incomes.

Though in his day taxes were based primary on property ownership, Thomas Jefferson believed that a progressive tax structure would best serve the cause of social justice.  In a 1785 letter to James Madison, Jefferson wrote:

Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise.

Wealth Begets Wealth

We’ve all heard the expression, “it takes money to make money.” Such colloquial sayings are very often over-simplifications, yet, like this one, they are also usually grounded in some truth. It isn’t always just harder work and greater initiative that enables some people to make more money than others. It is very often affected more by their position in life than by an intensity of labor.  There are a great number of factors that can help to establish one’s position in life—initiative, foresight, education, intellect, imagination, inheritance, familial or personal associations, appearance, and health, for example.  We have some control over many of these factors.  Others, we do not.

The most significant circumstance in determining our station in life is usually our immediate family, or lack thereof.  It is from our parent(s) that we learn what to expect in life.  This is why descendents will usually rise to roughly the very same socio-economic status as their parents—expectation, more than anything else.  If we are unfortunately born into poverty, or of slovenly or disabled or otherwise dysfunctional parents, it is up to us to expect and achieve more for ourselves.  But, while expectation is perhaps the most significant factor in determining one’s station in life, it is by no means the only factor.

Achieving an undergraduate or graduate degree, for example, is a result of not just desire, but of intellectual capability and an ability to navigate the economic demands of attending school. Sure, many people have been able to attain degrees on their own through loans and/or part-time employment, but many others have familial obligations that make such a scenario impossible (even if they may be brilliant).  In any case, there can be no doubt that excelling in college is facilitated by economic security.

Those young people who come from a family of substantial means also have the advantages of a safety net—a supportive family to fall back on in case of failure or setbacks, enabling greater risk taking and bolder ambitions.

There are also more direct ways in which having money enables us to more easily make additional money.  Those of us who have been in the work force long enough and have been successful enough to have accumulated substantial savings, or those of us who have inherited wealth, have an ability to generate “unearned” income in addition to our ordinary income—i.e. rents, royalties, interest, dividends, capital gains, etc. And the more we have, the more abundant and the more profitable such investment opportunities become.  Having assets also enables us to secure loans or to apply our own resources toward a business enterprise.

For those who start with no assets, no higher education, and no “connected” acquaintances—especially those who lack exceptional intellect—accumulating enough savings for productive investment can be exceedingly difficult.  The lower one’s income, the greater portion of it is required for the very basic and essential costs of living, such as food, clothing, housing, utilities, transportation, and healthcare (if affordable at all).  Even maintaining a bank account for somebody with very little money requires service fees that those of us who have more money are not required to pay.

Today 20 percent of Americans hold 84 percent of our nation’s wealth and a mere 1 percent of Americans hold half of that—42 percent.  There can be little doubt that the advantages of wealth do not follow the same one to one correlation that is implied by the use of the same tax rate for all income levels.  The advantages of wealth are exponential.

Societal and Corporate Infrastructures

None of us live in a vacuum. We live in a complex and dynamic society—the American society that well affords us an opportunity to prosper. No one can become wealthy, or even make a living at all for that matter, alone. We are either an employee or an employer. Even a self-employed one-man-enterprise has to have customers, suppliers, utilities, roads, general police protection, as well as his own basic education. We all make our living, at least in part, in conjunction with the labor of others.

As Americans we have today’s opportunities to prosper in large part because of those Americans who came before us and built our nation’s governmental, physical, and economic infrastructures, and because of the institutions that maintain those things today.  In exchange for the economic opportunities made available to each of us as a result of public investments and our safe and orderly society’s greater infrastructure, each of us is obligated to financially support our nation at a level that is commensurate with the financial benefits that we come to realize within it.

As we consider the degree to which those who realize the largest incomes do so only in conjunction with the labor of others, we might also consider the practical limits to how much someone can actually earn.  The salaries of some corporate managers, for example, have become quite large in recent years.  There is nothing too troubling about that.  It is merely the result of supply and demand.  If several companies are vying for one of a just few exceptionally talented managers, it makes sense that they will have to pay at least as much as any other company is willing to pay. And given the enormity of the financial stakes involved in properly managing a multi-billion dollar corporation, offering a manager an enormous sum in salary and bonuses can be prudent. We have to ask ourselves, however, “can anyone really earn $50 million per year?” There are people who bring in that much, and rightfully so, if that’s what the market dictates.  But can anyone really work a thousand times harder and/or a thousand times smarter or be a thousand times more deserving than those people who make only $50,000 per year (the median income in the U.S.)?  No one attains a position in which they make $50 million per year as a result of merely good luck. Such individuals possess tremendous talent and they have worked very hard.  They have made a lot of the right decisions in their rise to such a position in life.  But however one has risen to a position of making $50 million per year, they can receive that much money only because the money has been generated by the labor of those below them in the corporation, and within the context of our society at large.

The wealthier we are, the more direct benefits we tend to realize from our nation’s assets and infrastructure too. Business owners and corporate shareholders enjoy the unlimited use of roads and waterways, the availability of a publicly educated work force, and our nation’s armed forces protecting American economic interests around the world.  While we all enjoy the benefits of these things, those of us who realize the largest incomes as a result of business enterprise tend to gain the most benefit from them.

Supply-side Economics

Doesn’t taxing the rich hurt the economy? “Supply-side” macroeconomic theory does indeed proclaim that citizens with the largest incomes are the driving force behind our nation’s economy. Many of them, after all, are the small business owners and the entrepreneurs who produce the majority of America’s jobs. The more they are taxed, advocates of the theory declare, the less money they have available to invest in their businesses, and therefore, the less productive the American economy becomes.

Actual supply-side economic theory is not quite so simple as that, but this is generally how it is presented by a great many politicians and political advocates.  What these advocates overlook, or willfully ignore, is that such business investment is not taxed at all.  In fact, higher marginal personal income tax rates can actually induce some business owners to invest more in their businesses, rather than taking the money out as personal income and paying the tax on it.

The Heritage Foundation and others who advocate lower taxes for the wealthy as justified by macroeconomic assumptions cite several occasions in history when the lowering of the top marginal income tax rates were following by periods of accelerated national economic growth.  As we often find when someone advocates for a particular faction of society, they leave out pertinent information that does not support their preferred conclusion.  In economics there are always a multitude of variables that must be taken into account in order to reach a more objective conclusion. Not only does the Heritage Foundation tend to disregard factors outside of the tax rate changes, they also leave out those tax cuts that were not followed by accelerated growth, the tax increases that were followed by accelerated growth, as well as the more comprehensive historic correlation between personal income tax rates and economic growth.

Recent history provides a pretty clear indication that lower tax rates alone are not a panacea to an ailing economy, and that raising taxes on upper incomes is much less harmful to the economy than some proclaim.  Two of the most prosperous decades of the twentieth century were the 1950s, when the top income tax rate was 91 percent, and the 1990s, which immediately preceded all of the many tax cuts enacted at the urging of the Bush and Obama administrations.  Because of the Bush and Obama tax cuts, the top marginal income tax rate today is lower than at any time since 1931 (except for the brief period from 1988 to 1992), and the overall tax burden of Americans as a percentage of the GDP over the last three years has been lower than any three year period since 1941 to 1943.  And yet, our economy continues to struggle to recover from the economic contraction that occurred from December 2007 through July 2009, the resulting banking crisis, and subsequent high unemployment.

Trickle-up Economics

Another name for supply-side economics, often used pejoratively, is “trickle-down economics.” Perhaps a more relevant and authentic dynamic in the function of an economy could be characterized as “trickle-up economics.” That is, an economic model that emphasizes the importance of demand.

The reality, of course, is that both supply and demand are essential elements of any economic system.  But we do well to realize that, without demand, all of the supply in the world cannot make an economy grow and prosper. The first and foremost ingredient in a healthy economy is demand—i.e., lots of people who are able and willing to buy goods and services.

At the urging of a member of his board of directors in 1913, Henry Ford raised the wages of his factory workers from an average of around $2.50 per day to $5.00 per day.  It was an unprecedented and bold gesture.  Other automakers accused him of being a “traitor to his class,” and said that he would “wreck the industry.”  The Wall Street Journal called it blatantly immoral, a misapplication of “Biblical principles” in a field where “they don’t belong.” The dramatic wage increase was intended as a humanitarian gesture as well as a rather clever advertising ploy, but the consequences of the wage increase benefited the Ford Motor Company, its directors and stockholders, and ultimately the nation, in a number of ways that were unanticipated.

Absenteeism at the factory dropped from 10 percent a day to less than one half of one percent, saving the company millions of dollars in productivity and training costs for new hires.  Ford workers suddenly became proud of their association with the company.  The most significant aspect of the five dollar wage, an aspect the importance of which would only later become apparent, was the fact that it created a whole new group of consumers for Ford products. By increasing the workers’ salaries, Ford had elevated them to the middle-class and thus enabled them to buy middle-class consumer goods, such as new cars.

Similarly, a smaller tax burden on the lower classes can afford them a better opportunity to become enabled to improve their circumstance and to ascend into the middle-class.  As the middle-class is enlarged, the infrastructure of the marketplace is enlarged, and ultimately the opportunities for free enterprise and prosperity for all citizens are enlarged.

Wouldn’t a Flat Tax Be Simpler?

Many flat-tax proponents over the years have held up a postcard and declared that their flat-tax proposal would mean that everyone could do their own tax return on a short form the size of the card they were holding.  It’s a ruse.

Internal Revenue Service statistics show that roughly 70 percent of Americans already file their tax returns on simple “short forms.”  Those who file the longer more complicated returns do so because it is a benefit to them and to our entire nation.

Tax law is an effective way to encourage certain behaviors. We want to encourage people to give to churches and to other charitable organizations, for example. Our society has also chosen to use the tax code to encourage marriage, home ownership, and energy conservation—all things that have been judged to be beneficial to our society. Our tax returns, therefore, necessarily have provisions for reducing our taxes when we respond to the greater public interest.

Business owners have to account for wages, payroll taxes, the cost of supplies and other expenses, depreciation, capital gains, etc.  Various sources of “unearned” income also need to be reported if they are to account for and/or treated differently.

There is little question that our current tax code is too complicated and too cumbersome.  It is so much so that it is a significant drain on productivity—an issue that certainly needs to be addressed.  But its complexity, of course, has nothing to do with tax rates.  Most anyone who is capable of earning an income should be able to read a tax table or calculate a percentage.  Those who suggest that we need a flat tax “because our current system is too complicated” are being dishonest.

Doesn’t a Progressive Income Tax Punish Some People By Taxing Them at Higher Rates Than Others?

There has been a lot of discussion lately about how proposals to increase taxes on upper incomes constitute “class warfare.”  We often hear the expression “soak the rich.”  These expressions are born of the idea that taxing higher incomes at a higher rate is to treat some people differently than others—to punish those of us who have worked the hardest and smartest and who have succeeded, through our own initiative, in realizing a plentiful income.  Such an idea misunderstands the principle of progressive taxation entirely.

Properly implemented, a progressive rate income tax treats everyone in exactly the same way.  It is income above specified levels that are taxed differently, not people. Everyone would pay tax at precisely the same rate on every level of income that they may bring in. So an individual who makes $50 million per year would pay tax at the very same rate on his first $50,000 in income as the man who only makes $50,000, even if he might pay tax at a higher rate on income above $50,000.  Everyone is taxed in the same way, with the same set of rates.

At whatever rates we may choose to collect the taxes needed to pay for our national defense, highways, waterways, national parks, Medicare, Medicaid, welfare, medical and other scientific research, space exploration, resource management, and the many other things undertaken by the federal government, it appears that the most fair and prudent method of doing so is through a progressive rate income tax. We can see that, while treating all citizens by the same standard of taxation, such a system is considerate of the plight of the poor, understanding of the exponential advantages of rising income levels, and beneficial to the whole of our economic system and everyone who prospers from it.


The “Supply-Side” Allure

Like most Americans, I wish my federal income taxes were lower. I recognize that, as citizens, we all have a moral obligation to pay taxes to the society that affords us the opportunity to generate a plentiful income. But we want that obligation to be no more cumbersome than is absolutely necessary. We certainly don’t want our tax dollars to be used for wasteful government spending.  As a result, political debate regarding taxes and spending will always revolve around varying judgments of what constitutes “wasteful spending” versus “necessary spending” or “prudent investing” for the future.

There are other components of the tax debate too. The United States has a progressive income tax.  Those of us who realize the most gain from our nation’s opportunities are thought to have a greater financial obligation to our society.  Naturally, just how much greater that financial obligation should be in order that it be “fair” is debatable.

To counter the argument that fairness dictates that we should pay more, those of us who are asked to pay the most have an economic theory on our side that declares the health of our overall economy demands that we pay less. “Supply-side” macroeconomic theory proclaims that those of us with the largest incomes are the driving force of our nation’s economy.  We, after all, are the small business owners and the entrepreneurs who produce most of America’s jobs. The more we are taxed, the less money we have available to invest in our businesses, and therefore, the less productive the American economy becomes.

It is not just Republicans who have adopted the belief that lower taxes induce economic growth.  In an effort to stimulate the economy President Obama has prompted Congress to “cut taxes” numerous times since he took office. (The quotes signifying that these “cuts” have mostly been tax credits, rather than reductions of rates.)  In fact, one-third of the often maligned 2009 “stimulus package” was in the form of tax cuts. As a result of President Bush’s and President Obama’s tax cuts, the top income tax rate today is lower than at any time since 1931 (except from 1988 to 1992), and the overall tax burden of Americans as a percentage of the GDP over the last three years has been lower than any other three-year period since 1941-1943.  This relatively low tax burden is of course why our nation’s economy is now so robust.  Well… uh… Perhaps we should rethink our assumptions.

Competent economists know that no economic theory can explain all variables at all times—especially economic theories that are largely the product of factional interests.  Since those of us who earn the most have a personal stake in the principles espoused by supply-side theory, we might be tempted to credit it with too much veracity.  And when politicians take up the mantle of our cause, well, the rhetoric can become downright silly.

We often hear Senators and congressmen on television explain that since many small business owners and entrepreneurs do business as S corporations or sole proprietorships, their businesses are not separated from their personal income.  As a result, the politicians explain, higher personal income taxes take money that could otherwise be used for investments in equipment and the hiring of employees for those businesses.  What these politicians evidently overlook, or perhaps willfully ignore, is that these investments are not taxed at all.  In fact, higher income tax rates for individual business owners can actually induce them to invest in their businesses, rather than take the money as personal income and pay the tax on it.  For example, each year I will do a projection of my income near the end of the year.  If my income is expected to marginally reach into a higher tax bracket, I can then make investments in equipment that I might otherwise delay for some time.  Those investments are tax deductible, of course.  The higher tax bracket can actually induce me to invest in my business.

Supply-side theory is not so blatantly wrong as some politicians’ misuse of it tends to suggest.  Some aspects of the theory are certainly true on the margins under some circumstances.  But however valid it might be under some conditions, it is definitely not applicable to our economy’s current difficulties.  For the most part, we don’t have a supply problem.  We have a demand problem.  I say for the most part because there has been some reluctance on the part of our nation’s banks’ to lend.  But there is no shortage of capital held by most banks, corporations, or wealthy and middle-class individuals.  Personal savings are now higher than at anytime since 1994, and rising rather rapidly.  And American corporations are now holding more cash than at any point on record.  (This suggests John Maynard Keynes was probably right when he said tax cuts are less effective as a stimulus than government spending because people are apt to put the money into savings, rather than back into the economy as intended.)

There are many reasons why there is currently insufficient job-creating demand in the American economy.  Certainly one reason is that President Obama lacks the kind of leadership that instills confidence in consumers and businesses.  Another is that a great deal of current demand is for things made in China or otherwise outside the United States.  This, of course, is why China’s economy has experienced tremendous growth, and why our trade deficit is so large.  It isn’t just Walmart and other retailers buying from Chinese corporations that contribute to American unemployment.  From 2000 to 2009, American multination corporations shed 2.9 million jobs in the United States while adding 2.4 million jobs overseas—a trend that has continued.  Proctor & Gamble, the maker of many of the household products that we have all grown up with, now employs roughly 35,000 Americans, only 28 percent of its 127,000 employees worldwide.  General Electric, IBM, Pfizer, Apple, Hewlett-Packard, AT&T, and undoubtedly many other American corporations now employ more people outside the United States than at home.  (We have no way of knowing how many others because there is no SEC requirement that corporations disclose those demographics.)  This is due primarily to these companies’ doing business in a world market, but it is also due, in large part, to a quest for the cheaper labor and the lax regulation found in the third world.

Another explanation for insufficient demand for American-made products is the conundrum that Americans are saving more, which is good, and thereby spending less, which is bad.  There are other factors too, but here the subject is taxes—whether we are currently being asked to contribute too much or too little, and whether or how the economy is affected by progressive income tax rates.

Certainly one of the key factors in undermining consumer confidence is our nation’s massive budget deficit and the political gamesmanship that has greatly exacerbated its debilitating effect.  The main thing that will fix the deficit is economic growth.  But economic growth is stifled, in part, as a result of the deficit.  So it needs to be dealt with in a way that instills confidence, whether by reducing it now, or by implementing a plan that will ensure its reduction in the near future.  We necessarily have to reduce spending and/or raise taxes.

Supply-side theorists and the politicians who exploit supply-side assumptions insist that we cannot raise taxes on the affluent because it would harm the economy.  The affluent, after all, are the job creators.  These politicians contend that the only solution to the deficit and our currently sluggish economy and unemployment problem is to reduce government spending—to, ironically, put more people out of work.  They say “our country is broke” and that we cannot afford the current level of spending on Medicare, Medicaid, welfare, scientific research, resource management, and the many other things undertaken by the federal government.  Some have included defense, and still others have even included Social Security in the mix.

As we can see, raising taxes is much less harmful to the economy than some proclaim.  The two most prosperous decades of the twentieth century were the 1950s, when the top income tax rate was 91 percent, and the 1990s, which immediately preceded all of the many tax cuts enacted at the urging of the Bush and Obama administrations.

Our country is certainly not broke either.  Individuals and corporations are holding enormous amounts of cash.  So then what’s the debate really about?  What are the real choices?

It’s about the size and scope of government and the kind of society in which we choose to live—not economics.  Our major entitlement programs that take up such a large percentage of the budget will either undergo the minor adjustments necessary to make them sustainable in the long term, or they will be significantly downsized, privatized, or completely eliminated, as preferred by those who subscribe to the atheistic worldview of Ayn Rand—the view that the world is made up of “producers and moochers.”  The choices we have to make regarding taxes and government spending are choices about what we can accomplish as a cohesive society, versus what is best left to individuals.  We can certainly debate what, if any, things might be done most efficiently by government or what philanthropic endeavors warrant our contributions to government initiatives.  But let us not confuse those preferences with self-interested macroeconomic assumptions.

Because it serves our most immediate personal interests, supply-side theory is rather easily adopted as a major pillar of our ideology.  To shore-up that ideology, we have a number of think tanks, a couple of television networks, and a major political party all working toward the institutionalization of our favored economic assumptions.  The trouble with ideologies, however, is that, like political parties, they induce what the legal community calls “willful blindness.”  It is what happens when we choose to believe anything.  We will naturally seek conformation of the wisdom of our choice, while, either consciously or subconsciously, avoiding conflicting information.  Once a preferred belief has been expressed, pride can then become a powerful force in the hardening of an ideological stance.  We hate to be wrong more than just about anything.  This is why we should always endeavor to avoid ideological thinking or a proclaimed allegiance to a political party.  These things are not only acts of laziness, they are terribly blinding.

In conjunction with the economic contraction that occurred from December 2007 through July 2009 and the unemployment that followed, it has been the alluring but misapplied and ultimately misguided supply-side economic theory, along with an unwillingness to pay for the wars and entitlements we have purchased, that now accounts for our nation’s $14 trillion debt and the current $1.3 trillion deficit.  Whatever we may decide about just how much government is preferable, our nation’s economy now depends on our ability to stop fooling ourselves and to pay our bill.  Virtually everyone who is employed should have to contribute at least something, but since 20 percent of Americans hold 84 percent of our nation’s wealth and only 1 percent of Americans hold half of that, then we simply cannot avoid invoking the (bank robbing) Willie Sutton rule.  The very wealthiest of us have to contribute disproportionally, “because that’s where the money is.”