On these pages last week, you received a certain take on economic development in the 21st century. Some propose the French model. They say that the welfare state has created a high standard of living for French citizens. They also claim that the Bush Tax cuts in 2003 should be repealed to pay for welfare state increases. This worldview simply doesn’t match up with reality.
A key assumption of the “welfare state” crowd is that when taxes rates are reduced, tax revenue drops proportionally. I’m not sure where these people get their statistics, but one possibility is the Joint Committee on Taxation.
The Joint Committee on Taxation is responsible for telling Congress what would happen if tax rates change. However, the Joint Committee on Taxation is proven wrong every time tax rates change and not just by a little. When capital gains rates were reduced in 1997, JCT overstated revenue losses by $84 billion. That’s no small chunk of change. JCT assured Congress in 2003 that capital gains revenues would be reduced by $3 billion from 2003 to 2005. Actual revenues are $62 billion higher than JCT predicted over the three-year period.
Let’s open up with a few statistics from this recent round of tax cuts. First of all, the capital gains rate was reduced from 20 percent to 15 percent. What happened? Capital gains realizations have gone from $269 billion in 2002 – pre Tax Cut – to $539 billion in 2005. Do the math. I’m fairly certain that 15 percent of $539 billion is significantly more than 20% of $269 billion. In fact, government revenue from this tax has jumped by $31 billion in three years.
The concept behind this is pretty simple. Consumers and businesses are not static objects. If a business never responded to change, it would be dead within months. People do respond to change, and that includes changes in tax policy. Taxation decreases the incentive to invest. Once the tax level is reduced, there is more incentive to invest. Consequently, more Americans invest their money in stocks, the stock market goes up, and capital gains increase dramatically.
Think that this is the only way that the Bush Tax Cuts increased government revenue? The Congressional Budget Office has found that “total tax collections from all ‘non-withheld tax receipts’ – typically, non-salaried income – surged by 32 percent” as a result of Bush’s tax cuts. The Wall Street Journal recently reported that total tax revenue is $124 billion above what the Joint Committee on Taxation estimated. How many times will the JCT be wrong before Congress stops listening?
France is not an economic model we should be following. I suppose it does have its benefits. There’s the unemployment rate that hovers around 10% and reaches as high as 25 percent in some of the ethnic neighborhoods. There is the stagnating economy with GDP growth that rarely reaches 3 percent. According to The Wall Street Journal, health care is government-rationed as well. It hasn’t been that long since riots were causing problems in Paris. The people in France take to the streets to protest employment reforms. These reforms are really evil too: people under 26 may find it easier to work, and they may even get a 40 hour work week instead of the usual 37.
How does the United States fare in these categories? Unemployment in the U.S. sits at 4.7 percent overall. African-American and Hispanic unemployment are below the average unemployment in France. U.S. GDP has risen by close to 4 percent over the last 10 quarters.
There is a simple answer for why the French take to the streets to protest free-market reform while Americans do not. Dependence on government over decades has left the French unable to deal with a system where they may actually have to work once in awhile. Government should limit itself to short-term gifts such as food stamps and job assistance. Government should assist its citizens in finding productive work. It should not turn citizens into drones who come back repeatedly to feed at the government trough.For all of the perceived benefits of a “welfare state,” it reduces our ability to make choices for ourselves about our own care. Think that is not the case? In Canada, it can take nearly a year to get a routine operation like knee surgery performed. Government-sponsored health care means that government chooses the doctors and facilities, leaving private citizens out of the decision.
I have now just substituted my own statistics for those that I claim are flawed. Why should anyone believe me? First, my statistics are actual statistics, not the predicted ones. Second, the statistics I provided take into account market dynamics. Static models simply don’t measure up in the world’s number one economy.
The real problem in America today is not tax cuts. The real problem is spending, especially on social programs.
Reed Hanson is a junior electrical engineering major. He may be contacted at [email protected].
