The Progressive Tax Fantasy
Steven Pearlstein of the Washington Post put on an impressive display of progressive self-deception today with an editorial scoffing at the notion that taxes were bad for the economy. In Pearlstein’s curious conception, the harms of taxation are “almost always overstated”. What is truly destructive is the idea that “raising taxes is always and everywhere bad for the economy.” Pearlstein references economic models and terminology heavily in his argument. So it is remarkable that he fails to engage in any actual economic analysis. He argues:
The reason an entrepreneur buys machinery or hires new workers is not because he has an uncontrollable urge to create jobs and grow the economy -- it's because he expects to generate enough additional sales to cover those additional expenditures and generate a reasonable profit as a result. For small businesses, those expenditures are paid with pre-tax money, not after-tax profits. The only reason an entrepreneur might not want to reinvest his pre-tax profits back into the business is that he knows of an investment that offers a better pre-tax return or he wants or needs the money to spend for himself.
Pearlstein seems to think that he is making an argument in favor of taxation, but the opposite is true. He admits that entrepreneurs need to make a certain amount of profit in order to continue investing in their businesses – economists call this the normal profit. When taxes on after-expense income go up, owners no longer make the same profit. It becomes less attractive to keep investing rather than to contract a business and eat the revenue. Alternatively, business owners may try to transfer their capital to less productive forms of investment that nonetheless avoid the income tax.
Pearlstein elaborated on his bewilderingly consequence-free universe in a Washington Post online conversation. Asked how the income tax would change investors’ behavior, he responded:
The tax will change their behavior in that they'll have a bit less money to spend on vacations and new cars, or less money to invest in a venture capital fund or the stock market or Treasury bonds. They'll have a bit less wealth and less after-tax income.
So, according to Pearlstein, a tax increase will cause the people to buy less and invest less. Somehow, he expects this to have no negative consequences for the economy. The sad part is that Pearlstein is not even explaining how behavior changes. He is just listing the obvious effects of having less income. Behavioral changes amplify the economic losses. Income tax increases cause doctors, lawyers, CEOs, and others to work and produce less. They also invest less of their (lower) incomes, decreasing resources for future growth.
In a more candid moment, Pearlstein explained why taxes are so exciting to Democrats:
The President knows that to do stuff that needs to be done, including close the federal deficit, taxes are going to have to go up. And he think the best place to raise them is from the people who have basically collected 75 percent of the benefits of all the economic growth over the last several decades -- people with large incomes. Some of those are small businessmen, some of them are lawyers and doctors, some of them are investment bankers, some are successful investors and corporate executives. Its the old Willy Sutton thing.
Willie Sutton, asked why he robbed banks, was alleged to have answered: “that’s where the money is.” Like common bank robbers, progressives don’t really care what effect their money grab has on the rest of the country. They just want more funds for new social experiments and welfare patronage programs. If they have to grab it from the Americans who drove 75 percent of economic growth over the last several decades, then so be it!