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President Obama's recent call for higher taxes comes as no surprise because he has made his position on tax hikes evident. In an article for CNN Money, Jeanne Sahadi says, "For years, President Obama has been clear about his preferred tax policy: Tax the rich more and protect households that make less than $250,000 from higher taxes."1 The problem with this position is that it does not yield the results that are necessary to pump more revenue into the economy, create new jobs and spur economic activity. In fact, it does exactly the opposite.
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Why It Won't Work
The attempt to impose higher taxes on individuals earning over $250,000 and profitable corporations does not work because it simply motivates them to move their businesses and their assets to other countries or at the very least, other states that are more business-friendly, or hire experienced tax lawyers to find loopholes in the tax code that enable them to avoid paying those taxes.
Higher taxes and fees depress economic growth and may even "price" small companies out of the market and destroy jobs. U.S. corporate taxes are already the second most expensive taxes in the world according to a Fox News article by Doug McKelway. Mckelway goes on to say, "Many economists say that those rates are one of the primary reasons that hundreds of US businesses have fled overseas where the tax burdens are lower."2 These are jobs that are desperately needed by Americans and revenue dollars that could shore up an economy that is hurtling toward bankruptcy and default.
Finally, according to Robertson Williams, Tax Policy Center senior fellow, "...there just aren't enough rich people to generate the kind of revenue needed to substantially reduce deficits."3 If there really aren't enough wealthy individuals to tax, where will the burden of higher taxes fall but on the shoulders of the average American taxpayer, who seems to feel that he or she is taxed enough already? These hard working folks do not have the means to ship their funds offshore or manipulate the system to find tax loopholes.
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Economic Strategies That Do Work
If raising taxes and implementing more restrictions and fees does not work, what will work? For starters, it's a proven fact that competitive tax rates help municipalities attract new investors and businesses. These new businesses translate into new jobs and increased revenues that stimulate economic growth. The easier it is to start up a new business venture, the more entrepreneurs that will take the risk.
Obama's own debt commission report recommended tax reforms that would "...lower income tax rates and simplify the tax codes."4 As part of their strategy for reform, the commission suggested three tiers of tax reform that ranged from totally eliminating all tax breaks to eliminating most tax breaks but keeping those that would benefit households in the lower income brackets such as the earned income tax credit or the child tax credit. Other tax reforms proposed by the debt committee were reforms to Social Security, reduction of defense spending and the elimination or reduction in the mortgage interest deduction.
Reducing or eliminating antiquated programs like public sector employee benefit programs and other entitlement programs allows government at all levels to reduce tax rates to an attractively competitive level, put aside the monies saved into surplus funds for emergencies and balance their budgets. While these additional funds would probably not pay off the national debt entirely, they would go a long way toward paying down America's debt and keeping her out of default or bankruptcy court.
Talking about reforming programs like Social Security or Medicare is extremely controversial, and politicians are trying to avoid these discussions at all costs, but the reality is these programs are unsustainable and the need to revamp them into more fiscally solvent programs is long overdue.
Decentralizing government, eliminating wasteful spending, and requiring the federal government to pass and abide by a yearly balanced budget are other strategies that could work. According to Glen Beck, "We are in the midst of a revolution in decision making and control and the reason is simple: Decentralization improves performance, generates new innovations, and empowers individuals by encouraging them to take on greater responsibilities in return for greater potential rewards."5
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The Real Issue
One key point to realize here is that the real debate is not about the "haves" versus the "have-nots" or which party knows best how to solve this crisis. The real issues are power -- those that have it want to keep it -- and the incremental intrusion of government control in individual's lives.
The power to levy taxes is concentrated in a minority (the government), and they use that power to punish behaviors which they deem to be inappropriate, like drinking or smoking, by imposing heavy taxes on these commodities while they reward behaviors which they consider to be appropriate, such as buying green products, with tax breaks.
The capricious nature of these taxes stifles economic growth and incentive. Consider the absurdity of a situation where at one end of the spectrum, you have people who don’t want to earn too much for fear of losing what is being freely given to them (think entitlement benefits) while at the other end of the spectrum, you have those who don’t want to earn too much for fear of having it taken away from them at a excessively higher tax percentage rate. The problem with this scenario is the government pays more in benefits than they take in and they try to make up the shortfall by squeezing the wealthy for more money.
If you need more convincing that the time is long past to take a serious look at reforms in the tax code rather than implementing more ineffective tax increases, consider this. According to Graham Summers in his article It's GAME OVER for the US, "If the US were a company, it would already be in Chapter 11."6
Summers goes on to list some chilling statistics that show that over half of all Americans receive some type of an entitlement payment from the government. Even worse news is the fact that these government payments account for "...79% of household growth since 2007."7 Why are Americans depending on government hand-outs? The reason why they are becoming more dependent is because the money is readily available and there is little incentive to work because of the current punitive tax codes.
Reforming the tax code and implementing a fair tax system would encourage all individuals to work and provide them with the opportunity to compete fairly in the marketplace. Companies would bring their jobs back to the United States and workers would have more career opportunities from which to choose.
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What's Your Point of View?
These are my thoughts - what about yours? I'd love to hear your ideas and suggestions on how the economy can get a much needed jumpstart and folks can get back to work. Please use the comment section below to weigh in with your opinion.
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1 and 3 - Sahadi, Jeanne, "Tax the rich! OK, but then what, Mr. President?," (April 13, 2011), CNN Money, http://money.cnn.com/2011/04/12/news/economy/national_debt_taxes_obama/index.htm
2 - McKelway, Doug, "Could Simplifying Corporate Taxes Help Save the Economy?," (June 23, 2011), Fox News, http://www.foxnews.com/politics/2011/06/23/could-simplifying-corporate-taxes-help-save-economy/
4 - Sahadi, Jeanne, "Rundown on Obama debt commission plan," (December 3, 2010), CNN Money, http://money.cnn.com/2010/12/03/news/economy/fiscal_commission_plan_breakdown/index.htm
5 - Beck, Glenn and Balfe, Kevin, Broke The Plan to Restore Our Trust, Truth and Treasure, Mercury Radio Arts, Inc., 2010
6 - Summers, Graham, "It's GAME OVER for the US," (4/21/2011), Zero Hedge, http://www.zerohedge.com/article/it%E2%80%99s-game-over-us
7 - Cooper, James, "U.S. households getting more from Uncle Sam than they pay in," The Fiscal Times, MSN Money, http://money.msn.com/tax-tips/post.aspx?post=63c403d6-0a2f-4506-a8b8-25124d49889b
Henry, James S., "Tax Offshore Wealth Sitting in First World Banks," (July 19, 2010), Forbes magazine,http://www.forbes.com/forbes/2010/0719/opinions-taxation-tax-havens-banking-on-my-mind.html