THE FRAGILE ECONOMY
The President and Democratic leadership continue to press for increased taxes which they euphemistically refer to as the closing of tax loopholes. They do so in lieu of making serious cuts in federal spending, and they do so on the supposition that the economy can endure higher taxes without consequential increases in unemployment and welfare spending. They grossly misunderstand the fragility in the economy, something those of us who represent American business know too well.
Across the board from large publicly traded firms to small privately owned businesses, there is pervasive fear about the extent of consumer demand for products sold. Many, if not most, companies have experienced a downturn in sales, particularly those in retail. Others have experienced a drop in anticipated demand and still others face mounting regulatory and litigation costs at the same time that sales remain flat or slightly elevated.
Most firms in the American market are unable at present to expand their operations, increase their investments, or obtain business loans. Most are struggling and many are drawing down from reserves just to meet recurring obligations. Almost all firms, large and small, fear consumer demand because the typical American household has experienced a significant loss in after tax income over the last decade and will experience an ever greater loss following full implementation of the Patient Protection and Affordable Care Act (Obamacare) and related new taxes.
There is a perception abroad that the enormous size of the American market ensures its survivability. They contrast the American market with that of Britain following the First World War and that of Rome on the eve of its collapse, finding important distinctions. Nevertheless, the underlying dynamics at work have prevented the American economy from expanding for over five years. That failure to expand necessarily means that the economy while enormous is shallow. The home mortgage crisis, the banking crisis, and the collapse of several formerly leading firms year after year has taken an enormous toll in the tens of trillions of dollars, sweeping out from under the American market key structural supports that make it highly vulnerable.
It is this fragility that reinforces the conventional wisdom that you do not raise taxes in the midst of a recession. Without sustained recovery, there is no assurance that present tax increases and those proposed by the President and leading Democrats will not trigger a ripple effect through the entire economy that causes firm closings, job losses, and increased dependency on welfare. Indeed, a reverse Laffer effect is foreseeable where increased taxes do not result in a net increase in government revenues because of consequential increases in unemployment.
This reverse Laffer effect is already occurring in California as droves of individuals and companies make the exodus out of that state following its adoption of the largest tax increase in state history along with a formidable increase in the state sales tax. Comparable flights from taxation are occurring in Maryland where the state’s liberal governor has yet to see a tax or regulation he does not like.
Subscribe to the NewsWithViews Daily News Alerts!
“We can’t just cut our way to prosperity,” says President Obama, but indeed we can do just that. In fact, cutting is the only way to prosperity because our fragile economy cannot tolerate taxing our way to a balanced budget. It is only by making substantial cuts in spending, eliminating constrictive market regulations, and reforming entitlements that we have any hope of reversing the present course which leads inevitably and in a very short time to implosion of the economy, large scale unemployment, and collapse of the welfare state.
All of this brings to mind many predictions made by the late Chicago School economist Milton Friedman. When those in power presume to know better how to spend the hard earned wages of individuals and industry, we are but a short time away from economic destruction. We are long past that point in America, as now those in power do not consider it a privilege to spend your money, but a right.
Click here to visit NewsWithViews.com home page.