The Folly Of The Fiscal Cliff

Fiscal Cliff Grand Bargain Creative Commons Photo credit DonkeyHotey The Folly of the Fiscal Cliff

Americans have been exposed to a plethora of misinformation, prevarication, and spin artfully concocted by the Obama administration and its more-than-compliant media accomplices in the last four years. They have changed the Ten Commandments into the Ten Suggestions and the United States Constitution into a guideline to follow if it suits the agenda. America is so far gone and beyond repair that nothing happens in Washington unless it benefits the Democrat Party in general or the Obama regime specifically. Never before in our 238-year history as a representative republic have we been so polarized and divided.

Economic laws and mathematical axioms have been rendered meaningless as if gravity only exists if Barack Obama says it exists. He might have actually believed his own rhetoric when he said he could stop the rise of the oceans and heal the planet. Malignant. narcissistic. pathological behavior creates delusions such as a god-complex that actually creates its own reality. There is no longer right or wrong; only the moral relativism of the one in control matters. And Barack Obama is still in control of this country for four more years, if we survive that long.

The biggest folly going on in Washington D. C. right now is the sudden urgency to avoid the “fiscal cliff” by raising taxes on ‘those fortunate few’ who are most able to afford it, as the esteemed Senator Majority Leader Harry Reid keeps reminding us. O.K., Harry, we’ll take you at your word (although I can’t really tell you why) and tax the upper 1% of earners at a 99% tax rate for anything over $250,000. That would raise about $80 billion a year — enough to last about 8 days the way these spendthrifts are throwing it away. What do we do for the other 357 days of the year?

Two points: 1) Why don’t we ever hear about spending cuts and only hear about tax increases disguised by code-words like ‘revenue enhancement’? 2) How many people making $250k are going to keep working if they get taxed at 99%? Hint: Read Atlas Shrugged by Ayn Rand if you don’t know the answer. Soon, all the producers in this country are going to be going on strike. The moochers and the looters are going to have the wagon they are riding on pulled out from under them.

There is so much misinformation about economics. Either the Onion had it right when they listed “The 100 Worst Senators” in one of their typically sarcastic columns, or we are getting our legs urinated on by politicians who are then telling us it is raining. Or both. The Washington politicians are either unanimously, incompetent, or disingenuous (or perhaps a little of each.)

Where should a little Washington D. C. Economics 101 as it relates to the fiscal cliff begin? Let’s begin with the  chapter on the Laffer Curve. For those uninitiated, Art Laffer was sitting at a table discussing taxes and tax rates during the Reagan era when he wrote a graph on a napkin that became an economic axiom.

Picture a big “U” laying sideways with the two open ends on the left side of the graph. The vertical axis represents the tax rates, from zero at the bottom to 100% at the top. The horizontal axis represents the amount collected by the government, with zero at the left (or the intersection of the axes). The maximum tax collected begins to diminish at approximately a 50% tax rate because people are not going to work their butts off and then send most of their earnings to Washington, DC when the tax rates get too high. Somehow, this escapes the politicians, who either don’t know, don’t care, or just enjoy using the heavy hand of socialism to extract as much as they can from the private sector and call it “social justice” or “fairness.”

Next, in his excellent “Economics in One Lesson” (originally published in 1946), Henry Hazlitt dedicates his first lesson applied to Frederic Bastiat’s broken window fallacy, first described in 1850. This theory explains why high taxes, government subsidies, tariffs on imports, and so-called “stimulus programs” such as the American Recovery and Reinvestment Act of 2009 (an $831 billion boondoggle and payoff to cronies and selected democrat faves) are pure sophistry. They sound good but actually make the economy worse when the unintended consequences kick in.

In the broken window fallacy, a hoodlum heaves a brick through the window of a baker’s shop. The shopkeeper furiously chases the vandal but doesn’t catch him. After the initial shock, there comes a reflection by those in the gathering crowd that through the misfortune, at least the glazier can increase his business by fixing the broken glass. Say it costs $250 to fix. That will provide much needed income for the glazier; and in turn, he can share it with other merchants and vendors. This can go on and on. It seems like an additional $250 was put into the economy and recirculated many times. That money would not have been there if the window had remained intact. Was the little hoodlum a public benefactor instead of a menace? Not so fast. Because he has to dip into his savings to fix the window, the shopkeeper can no longer afford to purchase the suit he was going to buy from the local tailor. And the tailor had planned on using some of that money to buy groceries and other items. Thus, the grocer and the other vendors were also victims of the hoodlum by virtue of their lost income.

How is this relevant to today and the government? Contrary to popular belief, the government has no money of its own. To get it, either the government must take money away from individuals in the private sector, print it and thereby devalue the fiat money, or borrow it by selling bonds or treasury bills, which then pushes out the responsibility to pay it back onto future generations. Those are the only options — tax it, print it, or borrow it. The bad news is that those options are all destructive to the economy. And what, you might ask, is positive to the economy?

To the entrepreneurs and risk-takers, those who understand economic realities, the magic word that benefits the broader society is simply – profits. Public works jobs might also create jobs, but at the detriment of the taxpayers. And who do you think would be most judicious with the money: the job creators or the government?

How is all this related to the “fiscal cliff folly”? How much good is going to be done to society by taking more from the ‘makers’ and redistributing it to the ‘takers’? If tax rates are raised, where is the net benefit: the private or public sector? And if it is the public sector, what are the unintended consequences?  These questions need to be answered.

America does not have a tax problem; it has a spending problem. Flatten and lower the tax rates, cut out the loopholes, and watch the economy take off again. Put that together with massive spending cuts, done by eliminating or sunsetting everything that is not ‘enumerated’ in the Constitution as a federal government responsibility; and there will be a quick, possibly even deep recession for a couple quarters followed by something that happened during the 1980’s under Reagan. Jobs, prosperity, and wealth creation. Profits. Tax revenue. Growth. Wealth is a good thing – as long as it is in the private sector and not the government sector.

Next up are some ideas on spending that will make the fiscal cliff folly even more avoidable and how using an axe instead of a scalpel on the federal budget is the right way to proceed. That budget, incidently, has been AWOL and non-existent for 4 years. I’ll close with the wise words of my mentor, Jim Rohn: “We need lots of powerful long-range goals to help us past our short-term obstacles.”


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  1. Seeks_the_truth says:

    The economy has ALWAYS thrived under administrations that cut the tax rate but increased revenues. This was clearly shown in the Bush era. Allowing the people to retain more of their money spurred economic growth that was unprecedented.
    Why this "administration" believes the economy will grow with forcing the heavy burden of support of the takers onto the makers is head scratching. It's is just a recipe for disaster.

    • Linda A. From NY says:

      I agree with you, that taxing the rich will not help the economy, and less jobs or no jobs at all. This will put a stranglehold and there will be more people out of work and more people on foodstamps and welfare. If this is going Forward I hate to see what backward is. These morons that voted for this dictator, have help to take this country backwards. On Nov. 7 was the saddest day for America, many of us knew that the best days of our country is in the past, as long as this muslim is in charge. I wonder what our country will like in 4 years from now? with this idiot in charge.

      • Seeks_the_truth says:

        Guess he forgot to say it was Forward….off the cliff.
        I question what's going to happen when there's no longer the welfare/food stamp program to fall back on? We are already seeing signs.
        Ohio shows the pattern and it was right after the election. Because of the influx of so many unemployed, their welfare system couldn't handle the high load so they had to cut benefits.
        Call me cruel, but it's really hard having sympathy for these people who voted for their own destruction.

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