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Why We Can't Tax Ourselves Out of a Ditch
By Ross Marchand on September 08, 2011
During the nasty back-and-forth in the debt ceiling debate, inflamed rhetoric dominated discourse, and left reasonable debate trailing in the dust. Any opposition to a multi-billion dollar tax increase is seen as the artifact of a radical faction of Congress. The president went to great lengths to hammer this point home, and called a budget deal that included both tax increases and spending cuts “a balanced budget deal.” While balance is often necessary to make headway in our democratic system, the best ideas from both sides should be incorporated into any final plan, not simply a hodgepodge of the productive and counterproductive. If Obama and company get their way, however, tax hikes levied on consumers, investors, and small businesses will undo the effect that any spending cut will have in restoring confidence to our economy.
Our economy as a whole will suffer from any change in spending and investing habits that the tax hikes might cause. The Great Recession (and the aftermath) has taught us that when faced with a deteriorating economic environment, the “rich” will tighten their belts along with everyone else. If their liability is further increased through tax hikes, there’s the worrying possibility that they may cut back even further. In a fragile economy dominated by consumer spending, such a reckless action may usher in more economic despair. While consumer spending is a hearty two-thirds of the economy, it’s also crucial to look at the other side of the coin: investment. Simple economics demonstrates that if wealthy investors get a lesser return on their investment, they have less of an incentive to make that investment in the first place. The economy, in its present state of uneasiness, needs fewer barriers to investment and growth, not the intrusive hand of government.
A less-obvious effect of the proposed Obama hikes is the impact on small businesses. Plenty of companies, along with investment and law firms, file their income in the individual column, and would be hit by any tax hike. In fact, more than a quarter of all high-income tax filers are actually small business owners that are dependent on that income. We are not talking about fat cats, but rather the entities that hire people and keep our fragile economy moving.
The president and his congressional allies would be wise to listen to Daniel Webster’s warning that, “the power to tax is the power to destroy.” While compromise will be necessary to get our government and country on the right track, we cannot afford a policy that harms job creators, consumers, and investors alike.