Taxes, government dependency and happiness

Two interesting things rolled across my desk today, interesting because they address the same topic — dependence on Big Government — but reach diametrically opposite conclusions. The first is a Dennis Prager column that examines why American conservatives are happier than American liberals. This isn’t just Dennis’ opinion, by the way. Instead, several recent polls have shown that, on the whole, conservatives are happier people.

Dennis opines that the matter essentially boils down to a few key differences in outlook. One is a sense of victimhood. In America, those who turn to the government for succor are those who feel betrayed by the American system, whether because they’re blacks invested in the notion of racism, or people of any color feeling that they haven’t succeeded in the American system as they deserved. Another is the notion of utopianism. Liberals believe in perfectibility, and are constantly disappointed; conservatives recognize flaws, and are always thrilled to live in the society that best harnesses negative human traits and gives the most rein to positive traits. Conservatives are also more generous — they give their money away to causes, rather than waiting for the government to take it. That affects how they feel about their own contributions to societal good.

The other article that came to me, via a very Progressive facebook friend, is one by Thom Hartmann that argues in favor of huge taxes on the rich, with the assurance that, in Denmark, people are happy because they pay such high taxes, with the rich taking the greatest hit, but not feeling it, while everyone else gets cheap, high-quality government services. It’s a very sophisticated argument, and often a correct one, about the differing effect taxes have on the rich and the poor.

As I understand it, Hartmann argument boils down to this. The rich earn far more than they can ever spend. This means that taxes affect only their non-discretionary income, not their discretionary income. If they’re taxed more, they might save less, but it won’t affect the money they spend annually on both life’s necessities and its reasonable frivolities. The non-rich, however, spend everything they earn after taxes. If taxes are raised, they have less after-tax money to spend, which hurts them. BUT (and this is the kicker), Hartmann contends that, invariably, the market adjusts so that, after a few years, the non-rich end up getting from their employers precisely the same amount in adjusted dollars to bring them to spending parity with their situation before the tax increase.

This means, says Hartmann that, if top marginal tax rates are increased, only the rich will suffer. Everyone else will remain the same, except that the government will have hugely greater number of dollars at its disposal for free health care and education. Further, the less money the rich people have to throw around, the more stable the economy is, because it prevents bubbles. This means that there is no great wealth creation, but there are no collapses either.

A large chunk of the article is concerned with trying to figure out why non-rich people are so stupid that they don’t want to tax the rich at a higher rate, considering that, in the long run, higher rates will leave non-rich people with pretty much the same amount of disposable income. Scaife comes into all of this, of course, as does the Heritage Foundation, William Kristol, and the usual conservative suspects. I found that part of the article uninteresting. When Hartmann got back to substance, he started making thought-provoking points again.

Thus, Hartmann asserts that, if you increase tax rates, government actually shrinks, which is what sensible conservatives should want. I can’t summarize the argument adequately, so let me quote it here:

From 1985 until 2008, William A. Niskanen was the chairman of the Cato Institute, a libertarian think tank, and before 1985 he was chairman of Reagan’s Council of Economic Advisers and a key architect of Reaganomics. He figured out something that would explode Reagan’s head if he were still around. Looking at the 24-year period from 1981 to 2005, when the great experiment of cutting taxes (Reagan) then raising them (Bush Sr. and Clinton) then cutting them again (Bush Jr.) played out, Niskanen saw a clear trend: when taxes go up, government shrinks, and when taxes go down, government gets bigger.

Consider this: You have a clothing store and you offer a “50 percent off” sale on everything in the store. What happens? Sales go up. Do it for a few years and you’ll even need to hire more workers and move into a larger store because sales will continue to rise if you’re selling below cost. “But won’t the store go broke?” you may ask. Not if it’s able to borrow unlimited amounts of money and never–or at least not for 20 years or more–pay it back.

That’s what happens when we have unfunded tax cuts. Taxpayers get government services–from parks and schools to corporate welfare and crop subsidy payments–at a lower cost than they did before the tax cuts. And, like with anything else, lower cost translates into more demand.

This is why when Reagan cut taxes massively in the 1980s, he almost doubled the size of government: there was more demand for that “cheap government” because nobody was paying for it. And, of course, he ran up a massive debt in the process, but that was invisible because the Republican strategy, called “two Santa Clauses,” is to run up government debt when in office and spend the money to make the economy seem good, and then to scream about the debt and the deficit when Democrats come into office. So while Reagan and W were exploding our debt, there wasn’t a peep from the right or in the media; as soon as a Democrat was elected (Clinton and Obama), both the right-wingers and the corporate media became hysterical about the debt.

And when Clinton raised taxes so that people actually started paying the true cost of government (a balanced budget as in the years 1999 and 2000), they concluded that they didn’t need as many services, so government actually shrank–in terms of both cost and the number of federal employees.

As a non-economist, I have to admit that what Hartmann says makes a certain amount of superficial sense. I suspect, though, that there’s more to it. For example, Laffer’s curve may be involved. That says that lower tax rates create greater wealth, which actually increases government revenue. With greater government revenue, profligate politicians and greedy citizens have more to play with. The problem, then, isn’t the tax structure; it’s the boondoggles, and earmarks, and “other people’s money” syndrome that inevitably plagues an organization that lacks fiscal discipline.

My core problem with Hartmann’s whole premise, though, is that it works because his allusion to Denmark shows that what he really wants is a world in which the government is responsible for all income that’s not dedicated to life’s necessities. Under the current American system, that “excess” money that the “rich” have floating around — the money that Hartmann thinks the government should take and redistribute — is money that goes to banks that lend it to future homeowners and entrepreneurs; it goes into businesses that hire people; and it goes into funding innovation that improves people’s lives.

Having wealth circulate in the marketplace increases the risks of a slap happy economy, but it also vastly increases the possibilities of life improvement. It increases innovation and, yes, greed, which is a powerful motivator. In the Scandinavian countries, which until recently had stunningly homogeneous populations, no defense budgets, and no sense of obligation to the rest of the world (which we, in the U.S., heavily fund), it’s easy to have a tight little loop of shiny, clean, teeny houses; lean, mean Danish modern furniture; health care for that homogeneous population; and an almost zero track record on innovations that improve life for most of the world’s population.

Hartmann envisions a world in which everyone is happy with a brightly colored Danish modern version of very little. Hartmann also fails to take into account dynamic populations. The Scandinavian countries worked so well for so long because they were populated by people with precisely the same values and precisely the same life habits, habits that happened to be particularly neat and self-disciplined. The tremors are starting, though, as these same countries struggle to deal with newcomers who have nothing in common with this nice, neat, egalitarian very white world view. The welfare scams, violence, polygamy, cultural incest, etc., that the Muslim populations are bringing to Denmark and Sweden, and other northern countries, are all going to place a very interesting burden on these happy little taxpayers who could always rely on each other for homogeneity and on Papa America for world stability.

Before being quite so smug, places such as Sweden and Denmark might want to cast a jaundiced eye on Holland and Britain and France, all of which started with less homogeneous populations than the northern countries; all of which have had a head start on the challenging task of incorporating Muslims into their closed world views; and two of which (Britain and France) actually had to set aside defense budgets. Hartmann, too, might want to consider that America is Holland, Britain, France, etc., on speed when it comes to population diversity; constant immigration; and defense spending upon which the entire Western world has relied since 1942.

At bottom, I’d rather be a happy American iconoclast, living with a fairly low level of risk (heck, we’re not yet Argentina, Greece or Ireland) and wedded to the infinite possibilities of a dynamic economy that trusts the innovation and drive individuals, rather than coping with a government’s overarching static, inefficient bureaucracy. I’d also rather be in a surging country that, better than any place in the world, incorporates incomers, even illegal ones, as opposed to a country that is, for the first time, has to deal with profound outsider disruptions to its cozy little system. I’m happy here. Not droned, not pacified, not opiated, but happy.

Cross-posted at Bookworm Room

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