Saturday, May 26 , 2018, 4:43 am | Fair 52º


Harris Sherline: Making Dollars and (Non)Sense of Taxing the ‘Rich’

History shows that lowering taxes actually expands the economy, thus generating more federal revenue

Politicians continually dupe the public into accepting a broad brush character assassination that is intended to influence their perceptions for political purposes — for example, taxing “the rich,” who are generally characterized as greedy and selfish. The claim that rich people don’t care about anything but increasing their wealth is the argument du jour in the current political debate about continuing the Bush “tax cuts.”

No one ever seems to point out that the very people who label others as greedy are often guilty of the same behavior themselves. Why is it that taxpayers are called greedy if they want to keep their own money, but politicians who want to take it from them and spend it themselves are not? Or large corporations — as in drug, oil and energy companies — are labeled greedy when prices go up and their profits increase but not when prices go down and they lose money? It’s OK to lose money, but apparently it’s greedy to make it.

It is an article of faith of those on the left that taxes on the rich should be raised to produce more revenue for the government, which the politicians can then use as they see fit, often justifying increased taxation with the assertion that the money the government spends stimulates the economy.

However, the idea that raising taxes is the proper policy to stimulate the economy is questionable at best. The reason is simple: The government does not earn money. It can only get the funding it needs by taking it from individuals and businesses (“greedy corporations”), whereas businesses must earn it in the marketplace.

Both political parties are equal opportunity spendthrifts, and neither side can legitimately claim that they keep a tight rein on the public purse. Historically, the Democrats have been the principal exponents of big government and big budgets, especially for social programs, but the Republicans really haven’t done much better.

The difference between the two parties in the matter of taxation is not really based on the principle that we must pay for the costs of operating the government. It’s just the way Democrats believe it should be accomplished. And nowhere is the difference between the two parties more profound than their respective beliefs about how our market economy works.

Liberals generally believe the economy is a zero sum game, that government spending normally requires taking money from somewhere or someone else, hence it’s necessary to raise taxes to produce the revenue that’s necessary to fund the budget. Conservatives, on the other hand, argue that tax revenues are increased by expanding the economy, that lower taxes results in the expansion of existing businesses and formation of new ones, which in turn grows the economy and increases employment, thereby generating more tax dollars.

The weakness of liberal logic about taxes is the belief that people do not change their behavior when confronted with higher taxes. In other words, raise taxes and taxpayers will not adjust accordingly — that is, look for ways to avoid paying them. Liberal tax analysis is usually based on this premise, so their financial models tend not to factor in people’s responses to higher taxes.

But the public is not stupid. They invariably find ways to adjust when taxes go up. It may involve deferring income or investing in tax-free instruments, or perhaps something more complex, such as not expanding a business or starting a new one, which means less tax revenue for the government.

A good example of this occurred when a misguided attempt to tax luxury items in the 1990s backfired after a special tax was imposed on new yachts. The result was that American customers purchased boats outside the United States or just didn’t buy, which caused cutbacks and the failure of many American companies, along with the attendant loss of jobs in the boat-building industry.

Tax policy is now front and center as the two parties adapt to the results of the November elections. The Democrats argue that former President George W. Bush should not have cut taxes, asserting that reduced taxes and his out-of-control spending have put us into a deeper financial hole. They buttress their claims with the usual canard of the left that the Bush tax cuts favor the “rich,” which makes his policy an even greater sin.

Looking at the zero sum vs. the expanding economy concepts, it is well documented that tax cuts increase federal revenues. Two notable examples clearly illustrate this principle, one Democrat and the other Republican: Presidents John F. Kennedy and Ronald Reagan both cut taxes and both generated huge increases in federal revenues.

Bush did the same, although the left refuses to give him credit for it, claiming that his tax cuts only benefited the rich and did not really stimulate the economy. But the results prove otherwise.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog,

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