Laffing Our Tax Off

Would you like to solve the current economic crisis? Cut taxes. Cure cancer? Cut taxes. Create an effective formula for cold fusion? Cut taxes. Eat cheeseburgers and lose weight simultaneously? Cut taxes. It seems that cutting taxes is the cure-all that humanity has been waiting for but obtusely overlooking for some time now; and it is only through the hard work and diligence of reluctant heroes such as Grover Norquist and his no tax pledge combined with the messianic fervor of the Tea Party movement that we have not fallen into the abyss. Instead, the federal government of the United States finds itself in a stalemate… Shocker, I know.

The stalemate has ensued as a result of the broken down negotiations between the President and the Speaker of the House earlier this year and has now become centralized in the halls of Congress with the failure of the so-called super-committee to reach an agreement. One core issue of the stalemate is the desire by Republicans to make the Bush tax cuts permanent (just to be fair, there are other equally asinine causes perpetrated by the Democrats but that is the subject of another blog post to come). These cuts were originally designed to boost the economy by temporarily decreasing the income tax rates for households with an income of over $250,000 from 38% to 35%. The hoped for result was to free up more money at the top tax brackets so that an increase in entrepreneurial efforts would have a mutually beneficial effect on the middle and lower classes. This, of course, is a fairly straightforward example of the “trickle-down” approach to economic growth that became legitimized, and somewhat institutionalized, during the Reagan era.

This issue is heavily exacerbated by the Tea Party dogma calling for extreme deficit reduction without any form of tax increase, which brings us back to Mr. Norquist and his pledge. A pledge that is based on the principle that the exponentially increasing state of income inequality in the U.S. calls for one solution, cut taxes on the rich. It is the natural extension of the Laffer Curve, a somewhat dubious economic theory proposed by Arthur Laffer in the early 1970s when he sat down with a young Dick Cheney and said “Look, I can turn lead into gold – let me show you how on the back of this cocktail napkin!”

Put simply, the curve suggests that the higher the tax rate, the lower the amount of revenue accrued by the government. For example, a 100% tax rate would raise zero dollars in revenue, since no one would have any incentive to actually earn money they are not allowed to keep. Therefore, the lower the tax rate, the more willing the people are to earn money and then ultimately pay taxes on those earnings (provided it is at a lower rate). Granted, this is an oversimplified explanation of the theory, but then again, so was the cocktail napkin.

Laffer’s concept demonstrated that by cutting taxes on the rich you could actually raise revenue; and it had to be true… it was right there on the cocktail napkin! Well, to make a long story short: Laffer begot Cheney, Cheney begot Reagan, and well… Reagan begot America. Thirty or so years later here we are, a nation in the midst of the worst economic crisis since the Great Depression, and hopelessly deadlocked in a battle of ideologies (indeed, the Dems have their own intellectual equivalent of the Tea Party, that is the Occupy Wall Street movement… to be discussed later), being held hostage by a principle that is horribly inaccurate but oh so elegant to the ears of those who feel justified in incentivizing acquisitiveness with the common good. Laffer’s napkin gave justification to avarice by laying foundation for the mantra: “the richer I become, the better off America will be.”

I would like to say that we are now standing at a crossroads and we can apply compromise and smart negotiating to the issue and, ultimately, work through this crisis to a reasonable conclusion; but the truth is, if you are looking for that particular crossroad, I suggest that you look behind you. However, at this time, we have an Immovable Object (In this corner – the Republicans backed by the Tea Party movement) vs. the Irresistible Force (In this corner – the Democrats and the Wall Street Occupiers). My question for you, the (hopefully) rational and, more importantly – reasonable observer is this: Are we so screwed that the debate doesn’t even matter? What are your thoughts? I’ll be here “Laffing” so to speak…