But first, we should consider the question of why would the political class lie about the truth relative to economic matters. There are a few theories, all or some of which are likely true. First, consider an old saying by Ivern Ball: "A politician is a person who can make waves and then make you think he's the only one who save the ship." By making economics and the world seem more complicated than than they are, the political class can step in to take over more control of our lives since they want to convince us it is impossible for us to understand how to fix the economy, we must leave it to the experts, namely the politicians. But consider what we have lived through the past two years: the biggest economic crash since the Great Depression but no one in the political class saw the crash coming until it hit them flush in the face. If they could not foresee the biggest collapse in decades, what makes anyone think they can manage the day-to-day doings of the economy. They want all of the control, which restricts individual freedom, but have none of the expertise to do any kind of decent job.
By spreading lies about the economy, they can energize their base and demonize those with a different opinion. This helps to keep themselves in office by pitting different American groups or tribes against each other over myths that have nothing to do with reality and nothing to do with solving the economic problems facing the country. By throwing around myths like "the rich do not pay enough in taxes" or "governments can create jobs", we end up fighting with each other while the myth makers sit back and get re-elected regardless of how poorly they perform while in office.
Whatever the cause, political class myths about the economy divide America, restrict freedom, and prevent anyone from determining the root cause of economic problems and prescribing the right remedy. If the myths were shattered, the political class would lose control over a population that was finally thinking coherently about the reality of our economic situation.
Today we will deal with the myth that the so-called "Bush tax cuts for the rich" caused the economic downturn, resulted in massive deficits, and they need to be restored in order to get our national debt under control. Now, I never voted for Bush or thought he was much of a President. However, the three part myth discussed above is just that: a myth.
1) The economic downturn started in late 2007. Until that year, the United States economy recovered nicely from the economic downturn left over from the Democratic Clinton administration and the 9-11 terror attacks. For most of the Bush Presidency, unemployment stayed between 4% and 6% (a performance that Obama would kill for today) and the GDP of the country grew every year during his Presidency. Also, remember that beginning in 2006, at the onset of the economic collapse, the Democrats took over control of both houses of Congress. They have controlled Congress now for three and a half years and have controlled the White House for the past year and a half with the following results: a severe recession and unemployment hanging around 10%. Thus, there is no reason to believe the myth that the Bush tax cuts caused the economic downturn, the economic reality of the numbers, unemployment and GDP, do not support the myth.
2) The next component of the myth is that the Bush tax cuts caused massive deficits. While it is true that the highest dollar deficit during the Bush Presidency was also the highest dollar deficit up to that time, it was only about 3.6% as a percentage of GDP. When measured this way, the highest Bush deficit is only the third highest deficit of all time. Plus, the 3.6% is only slighter higher than the benchmark 3% that is generally recognized as the maximum safe amount of deficit spending a nation should get to. Obviously, any deficit is bad but to say the Bush tax cuts resulted in massive deficits is must a myth.
And remember, the Democrats controlled both houses of Congress during the last two years of the Bush administration, when the highest Bush deficit was incurred. If they were so worried about deficit spending, they could have forced the government spending levels to be reduced and the deficit reduced, given they controlled that part of government where Federal budgets are developed, Congress. Compare the Bush deficit maximum at 3.6% of GDP with the 2010 Obama deficit of about 10%, three times the amount that should be incurred before a nation seriously starts heading towards insolvency. Bush tax cuts for the rich did not cause massive deficits, massive spending by the political class, both political parties, caused massive deficits.
3) Probably the most obnoxious part of this myth is that by raising the tax rates on the richest Americans to the pre-Bush tax cut levels, the current sky high deficits will be solved. This is nothing more than the Democrats demonizing the rich to cover up their wasteful spending and their attempt to blind most Americans to the reality that taxing the rich, at just about any level, does not get America out of the death spiral of escalating government deficit spending. Don't believe me, let's do the math:
- Obama has stated so many times that he wants to raise taxes on those households making over $250,000 a year so that let's take him at his word and assume the increased, restoration of pre-Bush tax cuts will begin at $250,000.
- The highest marginal tax rate reduced by the Bush administration was 3.6% (from 38.6% to 35%) so let's give Obama the benefit of the doubt and assume that he will raise the highest tax rate 4%.
- According to the IRS, the number of taxpayers in the highest Adjusted Gross Income bands for 2008 (the latest data available) are as follows:
$500,000 - $1,000,000: 577,618
$1,000,000 - $1,500,000: 140,635
$1,500,000 - $2,000,000: 59,460
$2,000,000 - $5,000,000: 86,329
$5,000,000 - $10,000,000: 21390
$10,000,000+: 13480
- The lowest bracket above was reduced by one sixth in order to take out the number of people making less than $250,000 since they would not be affected by the Obama promise, i.e. raise taxes only for those making over $250,000 a year. Probably more than that should have been removed since it is likely that there are many more people in the $200,000 - $250,000 range than in the $450,000 - $500,000 range but I assumed a uniform distribution across the whole $200,000 - $500,000 range. This uniform distribution assumption gives every benefit to the myth.
- Although a more accurate estimate would have been to have access to the raw IRS data, we can get a realistic estimate, and a statistically valid estimate, by assuming that the people in the above brackets earned, on average, the midpoint within each range. For example, for our calculations, I assumed that the 86,329 taxpayers in the $2,000,000 - $5,000,000 range each earned $3,500,000, the midpoint of the range.
- The only open ended income estimate is the average income from those making over $10,000,000 since we do not have enough information from the IRS to do a viable estimate. Thus, I started with a $30,000,000 estimate and then changed it as a variable (see below).
- Once you make these assumption and run them through a spreadsheet, you estimate that the Obama desire to tax the rich will result in an additional $68.7 billion in tax revenue for the government. Given that the Obama budget deficit in 2010 is about $1.4 TRILLION, restoring the Bush tax cuts by 4% will pay off only about 4.9% of one year's of Obama deficits. Thus, the myth of taxing the rich is about effective as a burp in a hurricane, it will not come close to offsetting the massive and wasteful spending of the political class. It will only help divide America across income lines or tribes.
- But hold on you might say. Those earning over $10,000,000 a year might be making closer to $50,000,000 a year. Okay, plug that in to the spreadsheet and you see that the rich would only pay off 5.7% of the Obama deficit. If you want to be truly ridiculous and take the average income to $100,000,000 million a year you see that this ludicrous number still only pays off 7.6% of the Obama deficit.
- Remember, at $30,000,000 a year for the richest, the 4.9% estimate is a percentage of just the deficit, not the total Federal budget. It would be less than 2% of the total budget.
Forget the myths for a second and consider a real life economic situation. I have a friend who operates his own financial services business and has done so for several decades. He sells and manages health care policies and life insurance policies and is also a licensed broker of mutual funds and other investments. He works very, very hard, probably putting in more than 60 hours a week at building his business. I do not remember the last time he took a real vacation. Thus, I do not begrudge him anything he earns from his hard working style. However, in anticipation of Obama's economic policies when he was elected, this friend started to make some cuts in expenses. His one recreation outlet is to spend time fishing on his boat and maintaining a small vacation home at the New Jersey shore. Rather than sacrifice that part of his life to pay for the Obama tax increases, he decided to fire his housekeeper of many, many years and he and his wife have significantly cut back on the amount of money the spend on restaurant dining. Thus, as a result of this tax the rich myth, here is a real life example of how that myth worsens the unemployment rate in the housekeeping and restaurant industries while having a minimal impact on reducing the Obama budget deficits. This type of behavior and reality never seems to enter into the economic myths of he political class.
Combine these reality-based numbers with the video we discussed in a post last week where Nancy Pelosi publicly stated that high unemployment is the best way to generate jobs, and you see how inadequate the political class is from an economic reality perspective. Their myths divide the country, worsen our economic condition, ignore real life economic decisions by individuals and businesses, and restrict our individual liberty without solving any problems. Certainly not a good economic deal for America.
Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.
Also visit the following sites for freedom:
http://www.cato.org/
http://www.reason.com/
http://www.robertringer.com/
http://www.realpolichick.blogspot.com/
http://www.flipcongress2010.com/
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