Mirable Dictu! A Good Column by Ben Stein!

I nearly fell off my chair.

Ben Stein’s column this week, “What McCain Could Do About Taxes,” is sensible and vastly more tightly written and argued than his previous work. No free association or gratuitous name-dropping, no leaps of logic, no wishful thinking.

More shocking, not only does he take issue with the Republican party line, he comes out on the same page as Dean Baker.

I wondered if he had gotten a ghost writer.

He tells McCain to forget about tax cuts, they burden future generations and leave us indebted to foreigners, and that tax increases need to target the rich.

Reasoning like that shouldn’t be cause for celebration, save that the Republicans have become hooked on faith-based economics. While one robin does not make a spring, Stein’s piece may be a hopeful sign that reality is finally starting to sink in among GOP loyalists.

I found nothing objectionable on a first pass, which (given my critical eye) is a noteworthy accomplishment.

This is the guts of his article:

Let’s start with the obvious. Almost everyone dislikes taxes. No sane person enjoys writing out a big check to Uncle Sam when he could spend that money or bank it for retirement. By the same token, almost everyone likes the phrase “tax cuts” for the same reason.

The problem, and it’s a killer, is that over the years we have obligated ourselves as a nation to spend truly staggering sums. These sums are growing rapidly. They consist mostly of entitlements, like Social Security and Medicare; fixed obligations like interest on the national debt, pensions for federal and military employees and various subsidies that have already been enacted; and morally mandatory expenses like those for national security.

All politicians campaign on the promise to cut federal spending by identifying hitherto unfound waste, fraud and corruption. None of them ever do so in a meaningful way. Total federal spending has not once fallen noticeably since 1954, no matter the party or the promises of the incoming chief executive,

That is the first thing you need to know. The next thing is that the Republican Party (my party and yours) has for the last 30 years or so been operating under a demonstrably false and misleading premise: that tax cuts pay for themselves by generating so much economic growth that they replace the sums lost by tax cutting.

This would be a lovely thing if true, and the best of all ideas, the “something for nothing” idea. In fact, tax cuts lower federal revenue and generate federal deficits. It is also true that they do stimulate the economy and after a long period of years, federal tax receipts go back to where they were before the tax cuts.

For example, when President Bush enacted his tax cuts in the early 2000s, income tax receipts fell dramatically. It took almost six years for them to reach the level they had been in the last year of the Clinton administration, while G.D.P. in that period rose by roughly 30 percent. In the eight years Ronald Reagan was president (and I love and worship him), tax receipts did not fall anywhere near as much, but they rose more slowly, on a percentage basis, than they did in any other comparable eight-year period after World War II.

In other words, tax cuts do not pay for themselves, at least not on any basis I can see. Certainly, they are not worthless. They make taxpayers feel good and they generate growth. But basically, they shift the tax burden from us to our progeny and add immense amounts of interest expense to the federal budget. At this point, taxpayers shell out about $1 billion a day just for that item.

Moreover, immense federal deficits in modern life are financed largely by foreign buyers of our debt. This means that the American taxpayer must work a good chunk of the year to send money to China, Japan, the petro-states and other buyers of United States debt. In effect, we become their peons.

By flooding the world with debt, we in effect beg foreigners to take our dollars, and this leads to a lower value of the dollar and a higher cost of imports, including oil. If you feel pain filling up the tank, you can partly thank those tax cuts. If you feel the sting of inflation, you can partly thank the supply siders. Deficits matter….

You can propose still more tax cuts, create still more deficits and add to the debt, and say to yourself, like Louis XV, “Après moi, le déluge.”

Or, you can raise taxes. But whom to tax? The poor are, well, poor. The middle class is struggling to pay for its middle-class life. That leaves the rich. It would be lovely if we did not have to tax them. Many have worked hard for their money. Many have created useful businesses. Many of them are fine people.

But as Willie Sutton said when asked why he robbed banks, “Because that’s where the money is.” By definition, the truly rich have a lot more money than they need. If they don’t, then they are not rich by my standards. The first step toward putting our house in order, once we are past the seemingly looming recession, is much higher taxes on the truly rich and serious enforcement to prevent offshore tax evasion.

To put it even more starkly, the government — which is us — needs the money to keep old people alive, to pay for their dialysis, to build fighter jets and to pay our troops and pay interest on the debt. We can get it by indenturing our children, selling ourselves into peonage to foreigners, making ourselves a colony again, generating inflation — or we can have some integrity and levy taxes equal to what we spend.

Now some will protest that when we are entering a recession is not exactly a propitious time to raise taxes. Fair enough. But the general drift of Stein’s argument is a badly needed counterbalance to those who think the US can run up a tab to be paid by overseas is a game we can keep up forever.

Our foreign debt suppliers are already starting to wise up. They used to be content to buy Treasuries, which is the least costly way for us to compensate them. Put on your business hat: any startup prefers to fund itself with debt, preferably cheap debt, like friends and family. But more costly debt is preferable to giving up equity.

But now foreign governments, with massive foreign exchange reserves, are looking to invest overseas and are moving out of debt into equity related investments. That has the effect of increasing our cost of funding.

So even if we as a nation aren’t able to discipline ourselves, our friendly money sources will.

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  1. Anonymous

    OT (on Ben):

    The other side of the coin
    Commentary: The Fed’s doing more damage than good


    For example, between the end of December and the middle of February alone, the money supply M2 has expanded by a compound annual rate of 12%, according to the Federal Reserve Bank of St. Louis. This compares with a growth rate of only 5.5% from the four weeks ending February 19, 2007 through the four weeks ending July 23, 2007.
    The rate of growth for highly liquid funds which the St. Louis Fed calls MZM (money zero maturity), is even greater. It soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.
    Guess what all this money has accomplished. That’s right, Virginia, it has created a whole lot of inflation.
    The consumer price index rose 4.3% during the 12 months ending in January — up from little more than 1% in late 2006. For its part, the 7.4% leap in the producer price index over the most recent 12 months was the most for any 12-month period since October 1981!

  2. Anonymous

    Actually, Ben Stein has had a few sensible articles I’ve read now, and I say this as a flaming liberal.

    There is a wonderfully informative book by Jacob Hacker titled “The Great Risk Shift”. It makes a compelling case that risk, as measured by variability of income, that used to be the burden of the rich has in the past 30 years been shifted onto the backs of the middle class and poor.

    If, in a capitalist society “those who take the risks deserve the rewards”, then us not-rich folks are due some rewards.

  3. Anonymous

    Ben Stein wrote: “We can get it by indenturing our children, selling ourselves into peonage to foreigners, making ourselves a colony again, generating inflation — or we can have some integrity and levy taxes equal to what we spend.”

    Great article Yves, and great commentary. Lost in Ben Stein’s solutions is the only true path to wealth though (and I never hear anyone articulate this simple truth except brave souls like Ron Paul, Peter Schiff, and Murray Sabrin, republican candidate for Senator in New Jersey):

    Producing more than we spend.

    Until we do that as a nation, talk of taxing anyone anymore (rich, middle-class, or poor) is simply akin to robbing Peter to pay Paul, while our wonderful elected leaders find new and improved ways to spend any projected tax windfalls even before they arrive, thus exacerbating our already enormous problems. Until people wake up and realize this simple, yet un-talked about truth, I’m afraid ultimately, our benefactors currently buying our debt will eventually do our waking up for us. Then the real nightmare begins. Ben Stein, still asleep, is just talking nonsense here. I thought you would catch that :-)

  4. Anonymous

    OT, but worth reading!!!!!!

    Tajikistan ‘facing food crisis’


    Tajikistan is in the grip of emergency food shortages, the UN’s World Food Programme is warning.
    The deteriorating food situation is part of the energy crisis which hit the mountainous nation in the middle of its coldest winter for five decades.

    Tajikistan is currently using up its last energy resources, and it may face a total blackout.
    The Christian Science Monitor, neweurasia, and other media observers are predicting that a nascent hunger crisis will erupt into a full famine as a consequence of the energy shortages.
    An international appeal has been made by the United Nations, NGOs, and the Red Cross and Red Crescent for around US$25 million to assist the government. According to the United Nations, more than two million people could face starvation before the end of winter.

  5. Anonymous

    Taxes need to be raised 30-50% across the board, fiscal spending needs to be cut 30-50% across the board the tax code needs to be overhauled and simplified to make a 100 dollars send 30-50 dollars in for everyone including businesses. The US has a choice either get spending under control and pay down the huge pile of debt or face hyper-inflation as the politicians fire up the printing presses. I view firing up the printing presses as the most likely path unfortunately.

  6. doc holiday

    Glaciers of Tajikistan occupy about 6% of the national territory and play an essential role in the formation of Amu Darya River flow – the largest water system of Central Asia and Aral Sea basin shared by Tajikistan, Afghanistan, Uzbekistan, Kyrgyzstan and Turkmenistan.

    Significant retreat of many other glaciers is observed. By the end of 20th century, Saukdara glacier in the Pamirs and Zeravshan glacier in central Tajikistan shrank by 2 km. Hundreds of small glaciers, such as Diahandara glacier (area less 1 sq.km) totally disappeared – only dust and moraine indicate their former existence. Dramatic retreat of the glaciers on the Pyanj (Amu Darya) River’s left bank in the Afghan Badakhshan (Safedi-Khirs, Kuhi-Lal, Gindikush, Wahan) is reported by the remote sensing scientists. Comparison of the cartographic materials from the 1950s, 1980s and the latest satellite imaginary suggest that glaciers of Afghanistan may have declined by 50-70%.

    At high elevations 4,000 metres and above, where climate is cold and severe, glacier retreat is less pronounced and for some glaciers degradation rates make 1-2 m per year.

    If the current rates of glacier retreat retain or intensify, we estimate that by 2050s glacier area of Tajikistan could reduce by 15-20% and many smaller glaciers will totally melt away.

    Wow….global warming impacts in the summer and now the winter; guess they are cutting down all the trees for fuel, so this will get worse and worse!


  7. Anonymous

    The trouble with Ben Stein’s argument is that it fails to address the fundamental issue. Let us assume that taxes on labor income, dividend and interest income, capital gains income should be raised. The next question is to what level. Now we can project liabilities but we cannot project the revenue base. So let us assume no increase in the revenue base say over the next thirty years. So what should be the level of taxes. But you object we have to and can safely assume 2.5 to 3% growth in the revenue base regardless of the tax level. So then why not raise taxes on the wealthy, in the interests of equity, to 90% or so.
    No one is talking about that. But why not?

  8. Independent Accountant

    I disagree with you and Stein. Why? I oppose all tax increases. Period. As soon as taxes are raised, the President and Congress will come up with new programs to spend money on and we still have deficits, at a higher spending level.

  9. Anonymous

    I agree with Independent Accountant above. I will add that the federal budget will remain a mess unless we give up the American Empire and the resultant military spending.

  10. Anonymous

    The math just doesn’t work. Raising taxes on the wealthy might be a symbolic gesture, but it wouldn’t even come close to raising enough revenue to make a meaningful dent in budget deficits. The problem with milking wealthy people is that there just aren’t enough of them. To close the gap, you’d have to make major cuts in entitlements too, and that isn’t in the cards.

  11. archer

    6:07, you are wrong here.

    The top 1% makes 20% of income. We aren’t taxing dividend income these days. Hedge fund and private equity managers have their carried interest, which by any standard is labor income, taxed at a capital gains rate.

    We had top Federal rates as high as 70% in the past. The economy actually showed higher growth rates in those days. The idea that redistribution or high taxes on the wealthy is bad for the economy hasn’t been prove empirically. In fact, the reverse seems to be true.

  12. Yves Smith

    With all due respect, Independent Accountant and his supporters, you have short and selective memories.

    Clinton, of the supposed tax-and-spend Democrat tribe, had budget surpluses. In fact, the Treasury quit issuing 30 year bonds because the funding requirements were down (you still have to roll outstanding debt) because they figured they didn’t need it any more. There was even some debate as to what might happen if there were no more Treasury bonds.

    The Australians also run Federal government surpluses, consistently. They have no Federal government bonds. You can have a democracy and not engage in deficit spending.

  13. Anonymous

    I love the smell of static analysis in the morning. Smells like…desperation! While we may find it convenient to tax the rich, I think we’ll find that there are a lot fewer of them around. Capital is mobile….And we need it more than it needs us.

  14. Yves Smith

    Maybe not. Rich people could live in Bermuda tax free, or Hong Kong at low tax rates, but few bother.

    At least in America, a fair number of today’s rich are working rich, which means their mobility is limited until they decide to at least semi-retire. And if you run it correctly, having your own business is still one of the best tax shields. If you don’t get greedy about it, you can run a lot of expenses through the business and not run afoul of the IRS.

    I had a huge argument a few days ago with a reader who got so verbally abusive I had to delete his comments, but he presented himself as a rich person who was very aggrieved about his taxes (I have a sneaking suspicion he was more rich wannabe). I told him if he was so upset he should move to a place with lower taxes. That was when he got vitriolic.

  15. Francois

    This time, I have to agree 100% with Ben Stein.

    Anyone who has bothered to read “Free Lunch”. Perfectly Legal” or Gotcha Capitalism” knows perfectly well that taxing the rich, AT THIS TIME, is basically a return to a more normal state of affairs.

    By the way, the argument that more tax revenues is more occasions for the politicos to spend always carry the implicit assumption that any spending by Washington is bad.

    To that argument, my answer is: Bullshit! Of course, there is waste and pork and it irritates me like everyone else. Along with that, we have NOAA, the NIH, the Interstate highway system, (anyone remember the fight around that one?) the CDC and countless other services that the private sector, cannot, by definition fulfill. Plus, some projects like the ones at NASA generates a LOT of derivative technology that the private sector would NOT develop without that public “seed capital”, but is all too happy to use and improve thereafter.

    Furthermore, with the looming energy crisis coming, a lot of federal dollars will be needed to adapt current infrastructure (especially the residential sector) to the new reality of the 21th century.

    Finally, I refuse to saddle my children with my current expenses. it is morally wrong and economically stupid. After all, they’re the ones who will take care of us when we get admitted into nursing homes, need advanced medical care and all that. I’d like to know that they’re able to do so instead to trying to merely survive.

  16. Clayton

    Not that anyone noticed… but the last time we had a Ben Stein article, I pointed out that he’s hardly partisan and pretty much consistently irrational.

    But the fair weather fans think the’ve hit the jackpot when crazy Ben argues some end that they support… the problem is… he’s still crazy Ben.

    The Laffler curve (“taxes pay for themselves”) is a straw man that wasn’t ever respected in academic circles as a practical conclusion at current tax rates… only a theoretical point that remains true.

    Independent Accountant supports the rational conclusion here… Clinton’s budget surplus wasn’t fiscal discipline, but a failure to grow spending enough to keep up with higher taxes applied to on exploding incomes (hello bubble).

    From 1992 to 2000, tax receipts jumped a whopping 85% during a period of 55% GDP growth (all nominal values). Are we really shocked that they couldn’t spend it that fast?

    The more revealing conclusion arises from looking at the spending pattenrs within the period. From 1992 to 1997, the US economy was in deficit and spending grew 15.8% or a little under 3% annualized.

    While the government was in surplus from 1998 through 2001, using 2002 numbers may include unnecessary war values. However spending between 1998 and 2000 grew at an annualized rate of 4%. 1998 to 2001 grew at 4% (annualized) and 1998 to 2001 grew at 5% annualized (likely bad data even though the number is higher).

    This is just an example… I’ve run the larger regression (ad hoc) which suggests that the magnitude of the surplus/deficit explains about 15% of the growth in spending. That’s a non-trivial number, particularly compounded over several years.

    We also forget that the rich don’t consume proportionately more than the poor. This means that they’re doing something else with their money. More specifically, it’s being saved, giving banks and businesses the ability to borrow capital to purchase capital equipment, inventories, etc.

    If you have a mortgage… someone had to save that money… and the rich do save a lot. If your company pays for a machine or a desk or a computer… that’s money borrowed from someone (again a non-trivial amount from the rich).

    There are unintended consequences of taxes on the rich… and while tax receipts fall, the economy-wide impacts may not actually be negative.

    Obviously, I’ve made my points and will be back (eventually) to defend them (as will no doubt be necessary)

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