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Taxes and Human Behavior

Wednesday, September 29, 2010

In the latter months of 2008, liberals commented on how the increase in oil prices led to consumers using less gasoline and how the subsequent lower energy prices after the bursting of the oil bubble led to consumers driving more than when gasoline cost four dollars a gallon.  A December, 2008 editorial in the New York Times points out that lower gasoline prices make fuel efficient automobiles less desirable for purchase.  In this editorial, the Old Gray Lady uses this fact to support a steep gas tax increase to drive up the cost of energy and with it the demand for fuel efficient automobiles and the reduction in the use of oil.


What is most absurd about this proposal in the Times is that liberals constantly debate in favor of increased taxes on everything from income to capital gains.  They claim it will generate more revenue for the government coffers without thinking about the consequences from those policies.  Increased taxes only add to the burden of running a business.  President Johnson signed legislation in 1968 raising taxes as well as the creation of the Alternative Minimum Tax (AMT).  These acts were among the first dominoes to fall that led to the 1970s being one of the worse decades in American economic growth.  What followed in that decade were a series of price controls, increased regulations, and windfall profit taxes.


The most critical tax is the capital gains tax.  Capital gains tax cuts make investing, the backbone of economic growth, more attractive.  Lower corporate taxes make starting and growing a business more attractive because businessmen and entrepreneurs know they will be able to keep more of their money.  It is no mere coincidence that one of the greatest surge in economic growth in American history, 1980 – 2006, was accompanied by a reduction in tax rates, especially the capital gains tax.  Larry Kudlow, in a July, 2010 article posted at NationalReview.com, referred to a study done by two former Treasury economists which states that cutting the capital gains tax rate is the most effective way of growing the economy.  Referencing the study by Aldona and Gary Robbins, Mr. Kudlow writes, “For every tax-cut dollar on capital gains, $10.61 of new GDP is created.”  In order to know the reason the capital gains tax has the biggest impact on the economy, one must first know what economics and an economy are.  In his excellent book Basic Economics, Thomas Sowell states, “Economics is the study of the use of scarce resources which have alternative uses.”


If economics is the study of the use of scarce resources, then a growing economy is one in which society uses its resources more effectively.  This can be seen in the United States from the 1950s to the 2000s.  In this time period, the GDP growth has outpaced energy consumption during a time of overall economic growth.  Capital investment is critical to economic growth, because it leads to greater productivity and more wealth for all.  For example the invention of farm equipment like the combine resulted in a farmer tending to more land than he otherwise would have.  The assembly line, which would not be possible without capital investment, resulted in more automobiles being produced in a given day.  In the end, automobiles were more plentiful so everyday people could afford one.  Not to mention it makes deliveries of everything from mail to consumer goods easier because one does not have to rely solely on horses or trains; so the assembly line had a domino effect throughout the economy.


With January 2011 nearing, this means the Bush tax cuts will be expiring without action from Congress.  Among those tax cuts is the cut in capital gains tax, which is currently 15% and would go up to 20%.  President Obama is on record with raising the rate to 28% just for “fairness” even if tax revenues fall.  At the end of the day, you can’t help but wonder if the New York Times believes correctly that a higher tax on gasoline will result in less demand of gasoline, then why wouldn’t they also believe that cutting taxes on capital gains and marginal tax rates would result in greater capital gains and higher incomes for Americans.



Mark Scannell

Treasurer - Johnson County (Kansas) Young Republicans

LibertyLover commented on 11-Oct-2010 02:45 PM
Democratic fiscal policies will not only stunt economic growth - they will delay any meaningful recovery for Americans in terms of lower unemployment and a rise in investment.

Despite the debate over the AMT, expiring tax cuts for all Americans, and the capital gains tax, Democrats continue to push for a Value-Added Tax (VAT) in addition to the current tax structure, a tax levied on a good at every stage in the production process. This is a sure recipe for another recession.
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