Barack Obama, Supply-Sider

by Don Boudreaux on July 14, 2009

in Taxes

Here's a letter that I sent recently to the Washington Post:

Seeking to encourage African governments to embrace institutions that
promote economic growth, President Obama said yesterday in Accra that
"No business wants to invest in a place where the government skims 20
percent off the top" ("Text of Obama's speech in Ghana," July 11).

He's
absolutely correct.  So I trust that he'll offer the same advice to the
U.S. Congress, for this body taxes every dollar of corporate income
above $50,000 at a rate of 25 percent – and raises this rate to 39
percent on corporate incomes between $100,000 and $335,000.  The
average tax rate on corporate incomes higher than $335,000 is greater
than 35 percent.

Surely Mr. Obama's understanding of the
destructiveness of government confiscation ought not be lost on Rep.
Pelosi, Sen. Reid, and Co.

Sincerely,
Donald J. Boudreaux

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Daniel Kuehn July 14, 2009 at 10:39 am

Don -
Do you really, truly, actually not distinguish between a tax that contributes revenue to open, democratically established federal programs and a banana republic kick-back?

Surely your understanding of the destructiveness of government confiscation is more insightful than this.

yet another Dave July 14, 2009 at 11:10 am

I still can't decide if BHO is truly profoundly stupid (as only the enormously arrogant can be) or if he’s very shrewd and just purely evil. Either way it’s obvious that he’s an extremely dangerous hypocrite.

yet another Dave July 14, 2009 at 11:14 am

…"open, democratically established federal programs"…

Ha Ha – very funny. Unless you think that's a good description of crooked back-room deals to channel taxpayers money to favored cronies.

James July 14, 2009 at 11:28 am

Daniel, do you truly not distinguish between a tax that contributes revenue to open, democratically established federal programs, and to the taxes we pay in this country, a huge portion of which are anything but?

JohnK July 14, 2009 at 11:45 am

tax that contributes revenue to open, democratically established federal programs

That's a joke, right?

I_am_a_lead_pencil July 14, 2009 at 11:50 am

Do you really, truly, actually not distinguish between a tax that contributes revenue to open, democratically established federal programs and a banana republic kick-back?

No business wants to invest in a place that takes a large portion of your earned wealth. Whether they throw it in a hole, give it to tyrants, or build the worlds greatest monument – it is still a large portion of wealth forcibly removed.

This is the objectionable part. It is always the objectionable part no matter the surrounding politics. That some political environments are worse than others does not change the objection which Don highlights.

John Dewey July 14, 2009 at 11:58 am

Daniel Kuehn,

Do you really think voters understand they are taxing themselves when their elected representatives tax corporations? That's the big problem with corporate taxation. Unlike payroll and income taxes, the corporate tax is completely hidden from those who pay it.

If voters understood that they were actually paying for those "open, democratically established federal programs", we'd have far fewer such programs.

DAVE July 14, 2009 at 12:05 pm

DK

What happens to the money afterward is irrelevant. It reduces incentive the exact same way.

Be it a crooked African head of state or a cultural arts program, one would have no desire to spend 2-3 hours a day doing community service for either of them.

Marcus July 14, 2009 at 12:41 pm

"Do you really, truly, actually not distinguish between a tax that contributes revenue to open, democratically established federal programs and a banana republic kick-back?" — Posted by: Daniel Kuehn

Can you explain to us why that changes his point?

If investors don't want to invest in something where the government skims 20% off the top, I fail to see why investors would feel differently about that simply because the government doing the skimming is democratically elected.

dg lesvic July 14, 2009 at 12:44 pm

"No business wants to invest in a place where the government skims 20 percent off the top …"

I had to scratch my head when I read that.

From Obama, or any other of the big taxers.

The pot calling the kettle black, and without the slightest realization of it?

And then Daniel's comment.

Was he serious?

Then it comes to me.

Investors recoil at the politicians' taking the money for their own personal use but welcome it when it is for the good of the people, for the nation, for creating a favorable climate for investment. The 20% is too much to pay just for tribute but not too much for the favorable climate for investment.

That I suppose is the reasoning.

And quite apart from judgment, there is no rebuttal short of the argument for the the climate created by the free market vs that by the state, that the state and its taxes should be abolished altogether, that we get nothing from them that we couldn't get better and cheaper on the free market — with but one exception, the redistribution of wealth and income. And that is what it comes down to, the "bottom line," as Prof Boudreaux has so aptly called it.

vikingvista July 14, 2009 at 12:49 pm

"Do you really, truly, actually not distinguish between a tax that contributes revenue to open, democratically established federal programs and a banana republic kick-back?"

Let's all have an open democratic vote about whether DK should donate all his assets to Cafe Hayek and then go jump in a lake. I'm sure he'll comply with the wishes of the plurality.

Methinks July 14, 2009 at 1:05 pm

Yet another Dave, I vote for both profoundly stupid and evil. The two are not mutually exclusive and describe most of congress as well.

Don,

That 39% is on top of the cost of exceptionally stupid regulatory compliance which serves only to destroy choice and raise prices for consumers and wasting otherwise productive individuals' time.

yet another Dave July 14, 2009 at 1:12 pm

Methinks, well said – I suspect you're right on the money. Regardless of His intent, the result is evil. What I wonder is if the evil is an accident of his arrogant stupidity or a diabolical intended result. In the end it may not matter, but it's good to understand your enemy.

LowcountryJoe July 14, 2009 at 1:14 pm

>>Surely your understanding of the destructiveness of government confiscation is more insightful than this.<<

There's probably already a word or two that describes what just happened here. If there is a word or two, I just don't know what (it) they are. If there's not, what about kuehn?

If keen means "intellectually alert : having or characteristic of a quick penetrating mind" then kuehn can be "intellectually lost : characteristic of accusing someone of ignorance while only demonstrating one's own ignorance.

Daniel, that's some 'kuehn' insight from you above.

John July 14, 2009 at 1:25 pm

Once again a full two thirds of the posts are about Danny Boy, not the good host and his post.

Cafe Kuehn indeed.

vikingvista July 14, 2009 at 1:54 pm

Here's a simple law that would stimulate lasting economic growth without having the creeps in Congress pick winners and losers and entrench the current misallocation of resources:

ELIMINATE the corporate income tax.

Since individuals already pay personal income tax, there is no reason why those individuals working for or owning corporations should be inflicted with this additional penalty. Profits that are not reinvested in the company already get taxed as wages, dividends, or ultimately as capital gains–and the rates of these taxes could be equalized to all count as income.

This is already essentially realized for small corporations that structure under Chapter S.

Throw in a law that counts total compensation as an employee's taxable income, and adjust personal income tax rates to make the law revenue neutral, and you will relieve another government-imposed burden on our economy–healthcare inflation.

To make the changes more palatable, cut government spending sufficiently to give everyone a personal income tax cut.

Vote VikingVista in 2010.

Seth July 14, 2009 at 1:54 pm

Here's the full paragraph Don's containing Prof. Boudreaux's reference:

"This is about more than just holding elections. It's also about what happens between elections. Repression can take many forms, and too many nations, even those that have elections, are plagued by problems that condemn their people to poverty. No country is going to create wealth if its leaders exploit the economy to enrich themselves … or if police – if police can be bought off by drug traffickers. No business wants to invest in a place where the government skims 20 percent off the top … or the head of the port authority is corrupt. No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, even if occasionally you sprinkle an election in there. And now is the time for that style of governance to end."

Sounds like he's talking about Chicago politics.

JohnK July 14, 2009 at 2:07 pm

Vote VikingVista in 2010.

You got my vote!

Too bad the only way to get elected these days is to promise more government, not less.

gnatman July 14, 2009 at 2:09 pm

This is all lost on me when I see published information such as this:
TOTAL TAXATION AS A % OF GDP
Showing latest available data.
Rank Countries Amount
# 1 Sweden: 54.2 % of GDP
# 2 Denmark: 48.8 % of GDP
# 3 Finland: 46.9 % of GDP
# 4 Belgium: 45.6 % of GDP
# 5 France: 45.3 % of GDP
# 6 Austria: 43.7 % of GDP
# 7 Italy: 42 % of GDP
# 8 Netherlands: 41.4 % of GDP
# 9 Norway: 40.3 % of GDP
# 10 Germany: 37.9 % of GDP
# 11 United Kingdom: 37.4 % of GDP
# 12 Canada: 35.8 % of GDP
# 13 Switzerland: 35.7 % of GDP
# 14 New Zealand: 35.1 % of GDP
# 15 Australia: 31.5 % of GDP
# 16 Ireland: 31.1 % of GDP
# 17 United States: 29.6 % of GDP
# 18 Japan: 27.1 % of GDP
Weighted average: 39.4 % of GDP

yet another Dave July 14, 2009 at 2:10 pm

"…And now is the time for that style of governance to end."

BHO: hypocrite

BoscoH July 14, 2009 at 2:16 pm

Once again a full two thirds of the posts are about Danny Boy, not the good host and his post.

Cafe Kuehn indeed.

It makes 35% seem downright reasonable! Why though, is the corporate tax a subject of discussion? Does anyone know how much revenue it currently generates? I suspect it's an underperformer if BHO wants to reform it by effectively changing accounting rules. So what kind of money gets spent avoiding the tax? That's lost productivity too.

Crusader July 14, 2009 at 2:18 pm

So it's ok for Obama to "skim off the top" but not for tin-pot dictators? Unfair I say!

JohnK July 14, 2009 at 2:27 pm

So it's ok for Obama to "skim off the top" but not for tin-pot dictators? Unfair I say!

Since when have people in politics been bound by the same rules they expect everyone else to follow?

PDR Vet July 14, 2009 at 2:33 pm

BHO's comparison is ludicrous. In terms of impact on the investment climate, predictability is the most important element. Corruption is less of a problem if it's somewhat contained and a predictable part of doing business. This is why high corruption economies in East Asia seem to thrive nonetheless — it's more organized. However, you can't have a policy calling for organized, predictable corruption.

Apart from that, why is the focus always on the statutory tax rate? How about the effective tax rate of U.S. corporations? Accounting rules allow U.S. corps to provide two sets of books — one to investors and the other to the IRS. Naturally, the latter set of books minimizes profits and the the tax bill. Effectively, a huge % of U.S. corps pay no profit taxes despite their profits but you don't know that because investors get the other set of books.

So if you're going to whine about corp tax rates, let's do it in a comprehensive fashion and make sure the accounting rules get fixed (one set of books — let the corps decide which interests to maximize) and strip out all the deductions, kickbacks, etc. Then you have a case for lowering the statutory rates. Same basic argument goes for personal income taxes. The focus on rates only tells one side of the story.

JohnK July 14, 2009 at 2:35 pm

However, you can't have a policy calling for organized, predictable corruption.

Yeah you can. It's called government.

vikingvista July 14, 2009 at 3:13 pm

"Why though, is the corporate tax a subject of discussion? Does anyone know how much revenue it currently generates?"

12.6% of federal receipts.

http://encarta.msn.com/media_461544509/u_s_federal_receipts_and_outlays.html

John Dewey July 14, 2009 at 3:13 pm

gnatman,

Taxation understates the burden when the government runs huge deficits. The more important statistic is government spending as a percent of GDP. Here's what's been happening to the U.S.:

Government spending – % of U.S. GDP

1910 – 8%
1920 – 13%
1930 – 13%
1940 – 20%
1950 – 24%
1960 – 29%
1970 – 31%
1980 – 34%
1990 – 36%
2000 – 33%
2009 – 45%

vikingvista July 14, 2009 at 3:23 pm

"TOTAL TAXATION"

Not all tax structures are created equal. No taxes are fair, but corporate income taxes are particularly unpragmatic as they directly attack the engine of wealth and job creation. And as a surtax on income-tax-paying owners and employees of corporations, they are inequitable.

Unless, of course, you are a Keynesian. Then economic growth is nothing more than spending money. Any spending. By anyone. For anything.

dg lesvic July 14, 2009 at 3:36 pm

Vike,

It isn't that simple. The rationale for taxation is that it supports the "governmental" functions that are essential to business. By paying its taxes, business is paying for essential services, the same as when it pays rent.

The question then: why is it better to pay taxes than rent?

And the only answer, the bottom line, as Prof Boudreaux has called it, redistribution.

That is what you're going to have to deal with, and, until you do, you're just spinning your wheels.

MU789 July 14, 2009 at 4:02 pm

With a corrupt government official skimming off 20%, at least you know what the final cost will be.

With the government, you have to hope the IRS doesn't come in and decide you made a mistake and owe more. Or worse yet, you go to jail because the IRS code is written by the morons in Congress and even the chairman of the Ways and Means Committee says he can't understand it.

vikingvista July 14, 2009 at 4:24 pm

"It isn't that simple. The rationale for taxation is that it supports the "governmental" functions that are essential to business."

You forget that the owners of the corporation pay taxes on their income. If the services are provided from general revenue, they can be financed through general taxes. That's no different than the myriad programs your income taxes already support that you have no use for. It's not fair, but it's not exactly a paradigm shift either.

So it can be treated as a separate issue, but I agree with you that rent is preferable to taxes. Even direct billing by the government for its services is preferable. And with corporate profits not being taxed, it would be politically and financially feasible to move in that direction.

The main problem is that the huge influx of companies from overseas would create a labor shortage in this country, driving up wages. Immigration policy is unlikely to keep up. Although an innovative Congressman might propose a means whereby companies can finance the immigration costs of their own employees.

LowcountryJoe July 14, 2009 at 4:24 pm

I'm not sure why web addresses get shortened. But let me offer a piece of advice: make a link by using HTML code

K Ackermann July 14, 2009 at 4:41 pm

When a government taxes, where does that money go?

Does it just disappear?

yet another Dave July 14, 2009 at 4:43 pm

Does anybody know of a study attempting to quantify the economic impact of eliminating the corporate income tax? It seems to me that it would be a huge boost to the economy, but all the parasites that exist to support the tax would be looking for work.

S Andrews July 14, 2009 at 4:52 pm

Does it just disappear?

I wish it was that simple. At least, we will get lower prices. But the money actually lines the pockets of politicians, bureaucrats and rent seeking businessmen ( and their lobbyists )

vikingvista July 14, 2009 at 4:54 pm

"When a government taxes, where does that money go? Does it just disappear?"

When a burglar robs your house, where does that money go? Does it just disappear?

vikingvista July 14, 2009 at 5:00 pm

Can Keynesian theories discern an economic difference between a free market economy and an economy dominated by thieves? From a purely economic (rather than moral or other social) standpoint, do Keynesians care HOW the money is pushed around just long as it is pushed around?

dg lesvic July 14, 2009 at 5:24 pm

Vike,

What does all that mean, that you're going to address the "bottom line," or go on spinning your wheels?

Sounds like the latter to me.

Randy July 14, 2009 at 5:58 pm

Just thinking again. It occurs to me that the fairest possible tax would be a tax on government services. That is, if you want a service from the government you have to pay the associated tax.

vikingvista July 14, 2009 at 6:14 pm

"What does all that mean, that you're going to address the "bottom line," or go on spinning your wheels?"

Sorry dg. I don't know what you're talking about. I thought I answered your question.

vikingvista July 14, 2009 at 6:31 pm

"fairest possible tax would be a tax on government services"

Also, fee-for-service and outsourcing are two good ways for government services to transition toward privatization.

indiana jim July 14, 2009 at 8:37 pm

BO, SS; yes. BO, supply-sider no.

Dan Phillips July 14, 2009 at 9:47 pm

We all sit around and complain how Obama and the Democrats (or Bush and the Republicans) are so corrupt and mean and downright evil. But what are we going to do about it? Has there ever been a government anywhere, at any time in history, that didn't act in the same manner as ours? It's the nature of government to do those things. That's what it does. So the question is: how does humanity get out of this hell we've put ourselves into? What's the answer? Sitting around complaining about it resolves nothing. I imagine our government overlords are perfectly content to lets us point out their corruption as long as we don't do anything about it.

Lady of Liberty July 14, 2009 at 11:30 pm

***
Has there ever been a government anywhere, at any time in history, that didn't act in the same manner as ours? It's the nature of government to do those things. That's what it does.
***
Thomas Jefferson said almost exactly the same thing in very similar words.

"The natural progress of things is for liberty to yield and government to gain ground."

vikingvista July 14, 2009 at 11:41 pm

"But what are we going to do about it?"

Education and persuasion. Drs. B and R and much of the GMU economics staff are doing a lot about it. Some of the rest of us are educating ourselves in part by coming here.

What do you suggest we do? Concentrate in New Hampshire and secede?

Dan Phillips July 14, 2009 at 11:43 pm

Revolt.

LowcountryJoe July 14, 2009 at 11:50 pm

>>But what are we going to do about it?<<

Most armed revolutions end badly. The only thing that seems could work is advocating market-mechanisms to limit governments' ability to spend money since distribution/welfare state plays for many people.

In my opinion, more influential people should begin to openly advocate for decentralizing the taxing authority of the federal government. The federal government will still get revenue it's just that each individual state has to send the check in to leviathan. And, in turn, the individual states tax their residents using whichever tax schemes that they see fit. Effects: local elections become important again; congressmen and senators start getting an earful from local government asshats whenever the federal asshats propose more spending; tax competition amongst the states develops; congressman and senators bicker over how each state will be taxed and more gridlock ensues; a real dialogue about the sovereignty of individual states florishes.

dg lesvic July 14, 2009 at 11:55 pm

Here's what we do about it>

Adress the "bottom line."

And what is that?

Boudreaux has told us, Hayek has told us, and Mises has told us.

Redistribution.

vikingvista July 15, 2009 at 12:07 am

"Redistribution."

Okay, so more specifically, what do you suggest we do about it? Post our support for a flat tax on blogs?

I think the original question "what are we going to do about it" meant literally what are you, me, and like-minded people going to do about it.

dg lesvic July 15, 2009 at 1:22 am

Tell the world every chance you get that redistribution doesn't work, that it is completely counterproductive, not making the poor richer but poorer, that to take from the rich to give to the poor does not reduce but increases income inequality.

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