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May 6th, 2011 1:39 pm
Too Few Taxpayers

Tim again hits a crucially important issue  in his column that ran yesterday. When fewer than half of the population pays income taxes, the balance tips in favor of freeloading. The Washington Times editorial Wednesday laments that half of the equation: Welfare, of various sorts, is out of control.

It’s no wonder that the latest Agriculture Department figures shows one out of every five households received food stamps in February. The assistance provided to 20.8 million homes – up 20 percent in the past year-and-a-half – came at an annual cost of $68 billion. Free lunches were handed out to another 18.4 million, leaving taxpayers with a bill for $12.8 billion…. Instead of punishing enterprise and subsidizing poverty, the country needs to restore the conditions that promote prosperity. America’s corporate tax rate – currently the second highest in the world – needs to be cut. We need to restrain federal spending by scaling back the freebies doled out to far too many people. That’s the best way to restart our economic engine.

Only policies that promote growth will put more people above the income line at which they pay income taxes. Taxes are not a good thing, but making enough money to pay taxes is. Unless people are paying at least a nominal rate of taxes, they will feel no compunction to support the sorts of policies that reduce the need for taxes in the first place. From what they can see in the immediate horizon, at least, they are not at all invested in the health of the private economy, but instead are invested in the idea of bigger government — because bigger government now costs them nothing, and probably subsidizes them directly.

Tim’s quote from Orrin Hatch was good:

“An increasingly smaller group of Americans is shouldering the burden for an increasingly larger group of Americans.”

This is a recipe for ultimate economic collapse.

Veronique de Rugy adds more at NRO. She notes massive empirical research that shows high levels of publicly held debt have the effedct of consistently lowering economic growth. She ends with a quote that itself contains a link to this paper. In that paper comes a line that restates my point: “What is fleeting in economics is politically popular, while what is enduring in economics is politically unpopular.” The author descrivbes this phenomenon as the “shortsightedness bias” inherent in politics. When a majority of the public freeloads, their short-sightedness bias will be in favor of more freeloading, more debt — and, against their long-term interest, less growth. That’s why tax rates should not be raised, but why the tax base must be widened.  Counterintuitively, the way to widen the base is to keep the rates low enough to promote the economic growth that lifts more people into income levels at which they pay taxes. And as more people pay taxes, deficits and debt start to decline. A government that encourages economic growth can therefore be a more stable government than one that tries to soak the rich. A broad tax base thus supports ordered liberty. High tax rates undermine it.

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