The first presidential debate of 2012 is over, and it is fair to say Mitt Romney had a very good night, was on the offensive, did not make any meaningful gaffs, and by all reasonable accounts won this debate. Good for Mr. Romney, as far as that goes.
In the debate (focused exclusively on domestic policy), we heard a great deal about taxes. Mitt Romney attempted to make the case for, essentially, reduced marginal tax rates to spur growth. Romney’s plan calls for maintaining the “Bush tax cuts,” which were across the board rate cuts of roughly 20% from prior levels. In addition, Romney’s plan calls for eliminating the Alternative Minimum Tax, eliminating the estate tax and other tax reductions. Romney also mentioned this plan is coupled with eliminations of various deductions, credits, and loopholes. His plan, to the extent we have details, can be (seen here). Obama argued that this was a “$5 trillion dollar tax cut.” Romney then countered: “I’m not looking for a $5 trillion tax cut. What I’ve said is I won’t put in place a tax cut that adds to the deficit. That’s part one. So there’s no economist that can say Mitt Romney’s tax plan adds $5 trillion if I say I will not add to the deficit with my tax plan.”
President Obama’s criticism of the Romney plan was barely half-right, while Romney is betting on an idea that has, at best, mixed results (it also presumes growth). For accuracy sake, Obama gets his $5 trillion number by decadalizing (multiplied by 10) The Tax Policy Center’s estimate that if you were to remove the Bush tax cuts and not institute Romney’s other tax reductions, ceteris paribus, revenues would be $480 billion higher by 2015 (assuming no negative effects of increasing tax rates). Obama then multiplied that by 10 and arrived at his $5 trillion. Of course, $480 billion times 10 does not equal $5 trillion, but this is election debate politics and rounding is the norm. Obama was being disingenuous by a bit more than half because coupled with those tax reductions Romney has as part and parcel removal of deductions, credits and loopholes. Moreover, Romney also stated that there were areas of government that “would be on the table” and would be either defunded, or reduced (he failed to provide specifics except as a trade off between big oil’s $2.8 billion accounting procedures benefit and the $90 billion in subsidies to green energy business). Other than that (and a humorous comment tossed at PBS) Romney would not elucidate exactly what those deductions, credits and loopholes are that he will eliminate and close. Obama was clearly being disingenuous, and Romney was a bit too coy for your average policy wonk. So, those are the facts best we know them at this point in time. Nevertheless, what is important here is not either man’s prescription (or even the accuracy of the prescription or lack of detail), but rather the fundamental purpose and the moral basis for their prescriptions. What is their goal, and where does it lead?
First, Romney’s premise is to maintain the size and amount of revenue flowing into the government, and with growth actually increase it. I heard no specifics the other night (and certainly no philosophic argument) to the contrary, and he plans to accomplish this, just as George W. Bush argued, by maintaining that reduced marginal income tax rates (and other reduced taxes) will effectively return more revenue to the Federal Government as a result of their effect on economic activity. In fact, Bush is quoted (July of 2006) as stating: “The tax relief we delivered has helped unleash the entrepreneurial spirit of America and kept our economy the envy of the world.” Coupled with “broadening the base,” and eliminating deductions and credits, Romney is advocating no short-term reduction in revenue. For anyone who does not know what “broadening the base” means, it is simply increasing the number of taxpayers. Right now, roughly 50% of tax filers pay no federal income tax. Romney wants to get more taxpayers with ‘skin’ in the tax revenue game. So, that’s the Romney premise as I see it – maintain the size and scope (revenue-wise), broaden the base, reduce marginal rates, and get rid of yet-to-be-identified deductions and credits. In effect, Romney is elevating the governments’ interests above those of any one individual for, ostensibly, collectivized reasons but is attempting to make it palatable to fiscal conservatives with lowered marginal rates coupled with this broadened base concept. So, on its fact, this sort of tax policy prescribing forfeits to the Democrats the premise of sustaining big government.
Obama’s purpose seems clear. He simply believes that tax rates ought to return to the levels that were in effect under Bill Clinton (coupled also with eliminations of deductions and credits). His purpose is to fully fund the government at, essentially, its current level and would expand services as soon as revenues become available – some argue expanding services (or maintaining them) by using more borrowed funds from the likes of China (who-along with other foreign nations-buy a significant portion (roughly 50%) of our Treasury debt obligations (securities) presently). His list of expenditures and role for government is, I believe fair to say, a philosophic (politics, per se) position and on the margin definitely more than Romney – limited only by available sources of funds, extensions of credit/currency policy. Just as he and his supporters have no answer for what defines “enough” in terms of taxation, or what defines “the rich” when designing so-called progressivity into the tax code, they similarly have no answer to what the limits of government ought to be, and more importantly what is the philosophical boundry beyond which government has grown too big. Obama is clearly a believer in the ability of government in general, and the Federal Government in particular, to be an active interventionist player in our mixed economic system (involved in education, research and development funding (grants, etc.), welfare in various ways, interventionism abroad, infrastructure, military, Obamacare, more active regulation, subsidizing arbitrarily chosen industrial development, etc.). Moreover, he tends to eschew the notion of states taking more responsibility and control, while limiting the power from Federal initiatives.
Obama’s plan would not allow the rates to stay at their current level – effectively increasing taxes paid by anyone whose taxes were, rate-wise, decreased by the Bush era reductions. According to the same Tax Policy Center, his plan calls for the top marginal rates to increase from their current level to 36% and 39.6% after 2012, allow the personal exemption phase-out (PEP), limitations on itemized deductions, tax net long-term capital gains at 20%, and qualified dividends at 20%. Moreover, Obama is opposed to the base broadening advocated by Romney. This is, unmistakably, classic Democrat policy-making: progressive taxation, and ever increasing spending, premised upon the belief in the maintenance and growth of the Federal Government as a morally good actor in the lives of American citizens. All of this clearly with no concern with the darkly implicit result that government must logically supersede the rights of any one individual citizen. That, in fact, those who earn above some arbitrary amount are indeed the keepers of those who earn below that arbitrary amount.
To operationalize Romney’s premise, he argues that lower individual tax rates, corporate rates, elimination of AMT, and the estate tax will allow citizens to keep, on the margin, more money and thus engage in more economic activity in the private sector. This private sector activity, it is argued, will spur product and services demand, more production, and therefore more job growth. Those new employees will then also be paying into the system and therefore revenue will be enhanced. In a nutshell, that is the argument. Romney takes this a bit further, however. His prescription included a “revenue-neutral” feature that Bush did not promote in the same way, or to the same extent. This feature is clearly designed to answer the “how are you going to pay for the tax cut” argument that is always raised by Democrats.
Obama, on the other hand, makes no such assumptions and simply operationalizes his plan by shifting the tax burden towards relatively wealthier Americans, and increasing taxes on the middle class (the Personal Exemption Phaseout, and limitations of itemized deductions will do that), arguing that all Americans will benefit, jobs will be created, and we’ll eventually come out of this economic malaise and prosper as was the case during the Clinton presidency. Hand-in-glove with this rhetoric is almost without exception an allusion to what can now best be referred to as a rather thread bare cliche: trickle down economics. Apparently, Democrats and other surrogates for Obama have simply not read Thomas Sowell’s rather quenching paper published by the Hoover Institution and brilliantly commented on by the likes of Walter E. Williams. In a widely reported debate point won by Romney, Obama’s tax and spending plan was referred to as “trickle down government.” Nice sound bite, but in actuality it cuts both ways..
These sorts of policy prescriptions are precisely related to my point about tinkering with tax rates, and justifying the tinkering merely by their hoped-for effect upon revenue to the government (and thus allowing it to remain intact, and/or grow). Both men are using increased or steady revenue to the Federal Government as the fundamental goal here. This is no small point because such stands in stark contrast from simply lowering rates premised upon citizens (all citizens who pay taxes) retaining more of the fruits of their labor (thereby forcing a reduction in government), and directing those fruits to services and goods in the private sector, or to charity, or savings, that the individual deems worthy given their own individual circumstance. There is a clear moral argument for the latter, none defensible for the former. Yet, both men argue that jobs will be created and the economy will hum with a government at least as large and intrusive as it currently is. Romney less so regarding government workers, and Obama more so.
Eighty percent (80%) of the size and scope of the Federal Governement is principally driven by the size and scope of the employees who are in its myriad of departments (roughly 10 million), and the projects and dollar promises it makes. From a budgetary perspective Defense and International Committments (20%), Social Security (20%), Medicare/Medicade/CHIP (21%), Safetynet Programs (13%), and National Debt Interest (6%) are the “things” that make up the “size and scope.” As of 2010, over 10 million people were employed by the federal government. In pointing these facts out (source) it is important to note here that none of this 80+ percent is involved with the production of tangible goods or other free market demanded services. One might argue that pointing this out is a bit obtuse, but in fact it is no small point.
All of the resources used, and the people hired, come at a cost. And that cost is borne by people who are not among that 10 million strong federal group. The net effect of these programs is, indeed, hard to measure. However, it is not an obtuse observation to note that Frederic Bastiat’s broken window fallacy is most definitely at work here. If the size and scope of government at the federal level were cut in half we would clearly have a massive reduction in services provided, but we would also have a massive increase in resources available to the private sector. If you were to engage in a thought experiment projecting over 10 years what would be the net effect on the standard of living of Americans, our productivity, and our debt, of such a move neither you nor I could precisely calculate the result. Clearly, however, such a shift would not make the private sector smaller! And 1/2 of all federal workers out of a job would constitute only 3% of the total U.S. workforce. To argue that in order to improve our economy, or our horrid jobs situation, (new data out shows the labor force participation rate rising very slightly to 63.6 percent from 63.5 percent in August) policy ought to be adjusted to begin hiring more government workers is not justifiable, practically or morally. On a practical level, our fiscal problems are clearly not due to a lack of government employees. As alluded to above, government workers at all levels (local, county, state, and federal) receive their wages and benefits 100% from the taxes paid by people working in the private sector who produce tangible goods, and provide services demanded by others in the private sector. Services, by the way, paid for in a trade of value for value. If the private sector fails, or is further hamstrung, revenues will not just fall – they will crash at all levels. Yes, government employees also pay taxes but clearly that is a circular money flow. The source of the taxes they pay came from non-subsidized employment (or in a temporary sense monetary inflation through government debt), period.
Also, government workers are entitled to other benefits in addition to their taxpayer-funded payrolls, health care, and retirement benefits. They are also entitled to social security and Medicare. In effect, double dipping (for example a retired government school administrator who goes back into a government job gets a whole new benefit plan) on taxpayers who are the source of those funds as well. Clearly, without a doubt, the most expensive and inefficient labor in America are government employees (how effective they are verses privatizing what they do is clearly debatable). They create a profound opportunity cost on both the expansion of, and development of, products and market demanded services – “the seen and the unseen.”
On a moral level hiring (more) government workers as a means to enhance employment statistics or to improve the economy simply has no rational justification. The unasked question is this: under what moral code, theory, or rubric does one justify taking by force the wealth of honest hardworking private sector employees and redirecting it to hiring government workers who produce no tangible goods, and some of the services provided (teaching, for example) could be provided in the private sector more efficiently if the monopoly status of those services and employment was broken (again, k12 schooling comes to mind immediately). The answer is that there is no moral justification for it unless your morality is premised upon being ideologically predisposed to social mysticism and/or overt altruism; the antithesis of the moral premise of the unique American idea (that the rights of the individual supersede those of any government). This is referred to it as “the greater good” argument. We have seen the logical outcome of this form of “morality,” this greater good idea, in the history of the world – not a pretty sight. The preeminent examples include the National Socialist German Workers Party movement, and the Union of Soviet Socialist Republics. Extreme examples? Perhaps, but those are the potential (albeit nightmarish) outcomes stemming from this sort of thinking – the political policy direction.
Over the last 5+ years we have witnessed untold numbers of companies shedding employees and becoming far more efficient, or hiring sparingly. And they have done this to survive in an environment of uncertainty and lower economic activity – world-wide. The use of technology and advanced manufacturing systems that do not require the input of human labor have resulted in many firms able to actually maintain and/or enhance their earnings, and improve the productivity of the labor force they do have, all the while not needing to hire more labor. In short, by trimming their work-forces they have been able to keep their doors open in the hopes of expansion down the road by being in a more competitive position. The long run result of this will be the accumulation of capital by these firms, and the growth of both those and new firms as those sources of private capital are used to expand products and services that are actually wanted and needed by consumers, and business, all across the marketplace. And the reason firms are and have been acting this way has multiple dimensions, but the cost associated with an employee is incredibly high now due to mandated benefits in addition to their take-home pay, e.g. health care legislation mandates that create significant benefit costs to having an employee. In addition, union demands for wages unrelated to either profitability or the general state of the economy create additional disincentives to hiring. Point being, while the private sector goes about its adjustments for its actual survival, government has the incredible fortune because it is not exposed to market forces to be able to retain or increase its employment through political, not market, mechanisms. The result is partially to blame (cash-flow wise) in a Federal deficit presently at $1.3 trillion dollars. Full to blame by virtue of the policies those paycheck recipients make, and implement.
Now, I am not arguing here for anarcho-capitalism. We need good government services provided by dedicated people compensated appropriately. We need a rule of law, we need a strong and effective military defense against those who actually threaten us (as opposed to pseudo threats and tin horned dictators), we need effective regulations assuming we maintain our fiat currency central banking system. And, by the way, under this central banking (fiat currency) premise there is no such thing as laissez faire capitalism. True capitalism is premised upon a free market in banking and finance – we don’t have it, and therefore cannot have true capitalism. Those who would argue otherwise simply do not have a workable/meaningful definition of capitalism; capitalism has been most eloquently and accurately described by both Ayn Rand and Ludwig von Mises. With our banking system comes the absolute need for a myriad of regulations – the fiscal crisis, TARP, etc., are glaring proofs of this need. So, for many practical reasons we need government, and principally we need it for the protection of our individual rights. What we do not need and cannot sustain is a presumption that the mere hiring of government workers is, in and of itself, a good and necessary thing. And this is not a subtle distinction, it is a profound difference to which Obama and his supporters point to in no uncertain terms.
Alternatively, what moral justification can be made for not hiring more government labor; for reducing the amount of revenue to the government (Federal in this case), and thus by the opposite of government force of coercion (wealth confiscation by taxation), simply stemming or reversing the marginal flow of money through a reduction in government employment and activity? And by doing so allowing earnings to stay in the hands of those who earned it, to be spent not on government services as designed by a relatively small number of people in government bureaucracies, but rather by the independent market decisions of several hundred million consumers acting, essentially, for their own rational self-interests magnified by the almost instantaneous electronic communications of a modern society? The moral justification here is profound, and it rests on the concept of individual rights. It rests in the words and meaning contained in the Declaration of Independence, and in the intent of The Constitution. The founders were men of the enlightenment who saw that the proper role of government (all government) was by necessity and by respect for the individual subordinated to the rights and interests of individual men and women. That in order to have liberty and freedom, it must never be the case that the so-called rights of the collective (aka “the greater good”) be viewed as implicitly, and for sure explicitly, as a sovereign authority antecedent to the individual. In fact, they proposed, fought for, died for, spoke about, and wrote precisely the opposite: the individual logically precedes any institution of government thereby establishing inalienable individual rights to life, liberty, and happiness. After all, The Declaration of Independence did not state:
We hold these truths to be self-evident, that all government is created equal, that they are endowed by the men and women who live under its thumb with certain unalienable Rights, that among these are its continued existence, funding, and growing scope and influence–That to secure these rights, men have subordinated themselves to government, deriving its just power as a logical antecedent of the governed, –That whenever any man, or group of men, becomes destructive of these ends, it is the Right of the Government to shackle them so that it can never lose it’s scope of influence and laying its foundation on such principles and organizing its powers in such form, as to it that shall seem most likely to effect omnipotence.
So it is that individual rights as properly understood in the context of the actual Declaration forms the essence and foundation of the moral case for reducing marginal tax rates, and it stands in stark contrast to the obscene justification of enhancing revenues to a government that would in effect obliterate those very presumptions of the unique American idea.
Obama and his surrogates (such as Governor Martin O’Malley – MA) who suggest the maintenance of, or increase in, government hiring is on its face incredibly irresponsible in light of the massive evidence against such policy. Stunning because of the density of the mentality that would utter such a suggestion in view of all that this country has been through in the mortgage and credit crisis, all that many places in the world have been through, fiscally, over the last 5+ years. Moreover, there is simply no defensible case for hiring more government workers as a general policy prescription as a means to improve long-term, systemic joblessness in America (or anywhere). Every one of those jobs, if created for that purpose, represents a bullet in the rhetorical gun of an already too large and intrusive government. A gun to be pointed at some individual pursuing his or her own rational self-interests: their life, their liberty, and their happiness as they deem proper in a rights respecting free society. A gunman ordering them to stop what they are doing and by the force of that gun sacrifice that which they value more (their own independent pursuits) for that which they implicitly value less (some unseen bureaucrat providing some so-called public service that they will never benefit from to the extent of their sacrifice). The degree of what can only be referred to as moral turpitude cannot be understated here because of the direct implication and meaning for the further diminution of the unique (and sadly vanishing) premise and idea of America.
Now, I am taking pretty narrow aim here at Obama and his surrogates because, frankly, I think they are being more dishonest than the other side. For example, the argumemts regarding tax increases spurring the economy during the Clinton era is simply not sustainable – there were very unique circumstances at that time that totally overshadow any changes in tax rates. For a quick hit on that, please see this article, and this article. Notwithstanding, the sad truth is that Mr. Romney is essentially advocating the same end result, but through a different taxing mechanism that appears palatable to his constituency. Both are, I argue, immoral and the antithesis of the American idea. I do not see or hear from Romney or his close surrogates, an overriding premise upon limited and smaller government effectuated by force through a reduction in funding (clearly the only way it can ever happen). Rather, he promotes his plan by stating overtly that he does not desire to lose any revenue – and in fact will increase it through enhanced economic activity. The Federal Government is, in my humble estimation, too big already. It is too intrusive. Run the numbers into the future and you get a horrible picture. It has made promises it cannot possibly keep (unfunded mandates and deficits in the future as far as the eye can see), and with every glimmer of fiscal balance invents new ways to grow itself. It already implies (if not effectuates) the antithesis of the aforementioned unique American idea of the subordination of government to the individual. You cannot argue either man has any respect for the fundamental idea of individual rights, properly understood. And it is in this crucible of actual individual rights where the necessary premise for thinking in moral terms is tested. Merely tinkering with marginal tax rates is simply a smoke screen by both men, and their political parties, in their efforts to sustain, essentially, an immoral statist status quo.