Jewish World Review Nov. 25, 2004 / 12 Kislev, 5765

Thomas Sowell

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A taxing experience

http://www.NewsAndOpinion.com | When liberals in the media or in politics start being alarmed about the national debt, it means just one thing: They want higher taxes. The thought of reducing spending would never cross their minds.


As we are endlessly reminded, the federal government's debt has reached record levels during the Bush administration. That enables the liberal media to use their favorite word — "crisis" — and adds urgency to doing their favorite thing, raising taxes.


Since we have a larger population than ever and a larger national income than ever, it should hardly be surprising that we also have a larger national debt than ever. But what does it mean?


Donald Trump probably has a bigger debt than I do — and less reason to worry about it. Debt means nothing unless you compare it to your income or wealth.


How does our national debt today compare to our national income? It is lower than it was a decade ago, during the Clinton administration, when liberals did not seem nearly as panicked as they seem today.


As a percentage of the national income, the national debt today is less than half of what it was in 1950 and about where it was in 1940 — back in those "earlier and simpler times."


If someone were to produce a political dictionary, "crisis" would be defined as a desire to pass a law and "national debt" would be defined as a desire to raise taxes. And the two in combination would mean a desire to discredit the existing administration.


If it seems that raising taxes is the only way to reduce the national debt, at least when so much spending is mandated by "entitlement" programs, that only shows the need for an economic dictionary. "Taxes" is one of those treacherous words with more than one meaning, enabling politicians to shift back and forth between meanings when they talk.

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Unless spending is reduced, then of course more tax revenues are necessary in order to reduce a deficit or bring down a debt. But tax revenues and tax rates are two different things, even though the same word — "taxes" — is used to refer to both.


What "tax cuts" cut is the tax rate. But tax revenues can rise, fall, or stay the same when tax rates are cut. Everything depends on what happens to income.


Tax revenues rose after the Kennedy tax cuts of the 1960s and the Reagan tax cuts of the 1980s because incomes rose. Incomes are likewise rising during the Bush administration today.


If Congress can just reduce the rate of increase in spending, rising tax revenues can reduce the deficit and eventually eliminate it. But of course that will not give liberals an excuse to raise tax rates or even to denounce "tax cuts for the rich."


There was a time when the purpose of taxes was to pay for the inevitable costs of government. To the political left, however, taxes have long been seen as a way to redistribute income and finance other social experiments based on liberal ideology.


Given that agenda, it is hardly surprising that some of the biggest spending liberals can go into hysterics over the national debt, especially when that debt exists under a conservative administration of the opposite party.


This does not mean that nothing needs to be done about the national debt or about our tax system. A lot could be done about both — but it would not be what liberals want done.


Promoting the growth of the national economy would be one of the fastest and best ways of reducing the national debt. We could, for example, stop letting little bands of self-righteous activists stifle the building of homes or businesses under "open space" laws or stop the drilling of oil off-shore, on-shore, or anywhere else.


As for taxes, we could stop taxing productivity and start taxing consumption. After all, productivity is what makes a society more prosperous.


Someone who is adding to the total wealth of this country is not depriving you of anything. But someone who is consuming the nation's wealth, without contributing anything to it, is. Yet our tax system penalizes those who are producing wealth in order to subsidize those who are only consuming it.


Tax reform is overdue, national debt or no national debt.

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JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, "Applied Economics: Thinking Beyond Stage One." (Click HERE to purchase. Sales help fund JWR.) To comment please click here.

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