Thomas Sowell Weighs In

 Much to my shame I admit that I have only recently begun reading Thomas Sowell’s work. For those of you who are unaware of what I have been missing, Mr. Sowell is probably one of the most engaging economics writers out there. He is able to carry a point home with incredible ease and forcefulness. And for good reason. Mr. Sowell graduated from Harvard as an economics major, received a masters in economics from Columbia, and a doctorate in economics from the University of Chicago. The man knows his stuff.

 Introductions aside, on the 18^th of July Sowell released an article entitled “Dissecting The Demagoguery About 'Tax Cuts For The Rich'”. It’s a great article for anyone who has been following the winding road that has been the deficit-ceiling talks. In it he deals with why seeking to decrease taxes isn’t such a bad idea, especially if one wishes to increase tax revenue.

“At various time and places, particular individuals have argued that existing tax rates are so high that the government could collect more tax revenues if it lowered those tax rates, because the changed incentives would lead to more economic activity, resulting in more tax revenues out of rising incomes, even though the tax rate was lowered. 

This is clearly a testable hypothesis that people might argue for or against on either empirical or analytical grounds. But that is seldom what happens.”

Later on, Sowell delivers some facts to test this hypothesis:

“The facts are unmistakably plain, for those who bother to check the facts. In 1921, when the tax rate on people making over $100,000 a year was 73%, the federal government collected a little over $700 million in income taxes, of which 30% was paid by those making over $100,000. 

Revenue spiked as tax rates were slashed. 

By 1929, after a series of tax-rate reductions had cut the tax rate to 24% on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65% was collected from those making over $100,000.”

Throughout, Sowell cites the example of Andrew Mellon (and does so better than I attempted to do in my last article). It’s a three-part piece and I encourage everyone to check it out. It’s good reading. Most importantly, it should cause you to really think about your philosophy on taxation as Americans wrestle with the best way to handle the debt crisis.

Here's the link to the article: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=578623

As always, be sure to enjoy the article and think about it after you read it.

Tyler Holmes

Proverbs 14:15

Is a Compromise Even Possible in the Debt Talks?

            Watching the back and forth between the President and the U.S. House of Representatives makes one thing exceedingly clear: there is a major division between the two parties over taxation. In attempts to control the swelling debt crisis in America, both parties have agreed that something needs to be done about federal spending. That much should be clear to anyone. However, in addition to a restructuring of government spending, the Democrats want to consider tax increases aimed at the wealthier population of Americans to increase revenues. Republicans refuse to even entertain that thought. In fact within the last couple of days, Republicans have refused a 4 trillion dollar deficit reduction plan because it included tax increases. But why? Republicans made a big fuss about decreasing the federal deficit, why won’t they increase revenues to fight the deficit? I believe that the Republicans have a valid reason to fight increasing taxes. But not only that, I believe that the Republicans can keep their promise to prevent tax increases AND still be able to compromise with the Democrats to work out an effective deal to lower the federal deficit.

            Literally every news article about the debt-ceiling talks states that the Republicans think that increasing taxes would be a job killer. Republicans fear any increase in taxes will hurt economic growth and recovery. The idea is that taxes are just like any other expense that a business must face. If the expense is too high, the business suffers. It must either cut jobs or raise prices. Both options would be disastrous to a slowly recovering economy. So Republicans are simply trying to avoid creating another recession as they work out the budget talks. Corporate tax is already hovering around 34%-39% for businesses earning more than $75,000 a year. I would rather see that 34% reinvested into the economy than run through the gears of the government.

            Now some of you may be saying to yourselves, “Yeah, yeah, yeah, tax rates for businesses are high, but businesses never pay close to 34% of their income in taxes because they have all these tax loopholes and corporate exemptions.” And if you are saying that to yourself, you are absolutely right; big businesses don’t pay close to what their tax bracket says they should pay. These loopholes by themselves cost the government billions in tax revenue. Democrats have been rightly railing against the Republicans for not fighting aggressively to close loopholes as part of these deals.

            Now let’s hold up on this point for a second. At the end of the day we need to see the government pull in more revenue for any compromise to happen. As it stands businesses should pay somewhere around 34% in taxes on their income but they have found a lot of ways to dodge it. This has dramatically decreased the government’s tax revenue. Therefore it’s hard to believe that further increasing taxes would substantially increase revenues. Businesses would just wriggle their way out of it.

            If there is to be a compromise, I believe it will be found in the model set by Andrew Mellon. Mellon, the successful banker whose wealth peaked around 300 million dollars, was appointed Secretary of the Treasury under the Harding administration in 1921. Similar to today, Mellon had to find a way to increase revenue and decrease federal spending to pay the debts incurred in WW1. Mellon noted that when taxes were too high people just avoided paying them. Business taxes in those days came in around 72%.  In his mind the government was a business, and just like a business the government could only charge what the people could pay. To charge any higher would hurt the government in two ways. First it would slow economic growth by forcing businesses to pay taxes instead of reinvesting that money in their company. This meant that businesses couldn’t easily seek new opportunities to increase income, thereby decreasing the total amount of taxable income for the government. Second, as stated above, businesses would seek out ways to avoid paying the taxes.  So for Mellon the plan was simple: allow businesses to pay a lower, fairer tax and insure that businesses pay what they are taxed. And that's what he did. He decreased business taxes to 24% and closed loopholes with the result being an increase in federal revenue.

            I believe Mellon’s plan is the perfect middle ground for Republicans and Democrats. Republicans don’t have to raise taxes and Democrats can reform tax laws to cut out loopholes for businesses, something they have historically championed. Not only do both parties get to save face and earn points with their own voters, they can also focus their energies on fixing entitlement programs like Social Security and Medicare; something neither party seems to be handling well. But that’s just my two cents; in the comments below, I’d love to hear what your solution is.

Tyler Holmes

Proverbs 14:15

South Sudan Independence: The Diplomatic Road to Liberation

The politics of military intervention have taken different turns over the past months. The spring revolts in the Middle East coupled with the death of Osama bin Laden have led the international community to question the use of armed forces. The Sudan crisis, which has been obviously forgotten in the midst of current events, challenges both advocates of intervention in the Darfur genocide and supporters of diplomatic measures in Southern Sudan independence peace talks. On the one hand, the Khartoum government has oppressed and slaughtered more than three hundred thousand innocent civilians in the western region of Darfur in an attempt to impose Sharia law. Civil right defenders accurately underscore these crimes against humanity and plead for international intervention with college banners such as "Save Darfur." On the other hand, United Nation decedents have vouched for more diplomatic sanctions such as the imposition of peacekeeping forces first under the leadership of the African Union and later with the presence of the Blue Beret. But should the United States and its allies have taken a harder stance in these atrocities?

At a first glance the answer seems self-evident. Indeed, the lack of engagement in Darfur and the prioritization of other political agendas, such as the war against terror in Iraq and Afghanistan, seem unjust and contradict the Declaration of Human Rights, which upholds the individual when confronted to an oppressive state. Furthermore, self-interests have undeniably influenced the outcomes in Darfur as countries such as France and China have invested interests in Sudanese oil. So, are these diplomatic measures props set up to protect the politics of our western nations or are these real efforts to bring peace to a twenty-two year conflict?

Despite the horror in Darfur, one must take into consideration the geopolitical context. This might seem like a harsh response but the underlying conflict remains the North-South civil war, which has resulted in the death of more than two million people and the displacement of another four million. These acts of violence do not forgive the massacres committed by the Janjaweed militias; however, they explain in part the reasons behind the promotion of peace talks rather than further violence. Therefore, the real question is whether the crucial international relations in Sudan ought to outweigh the crimes against humanity perpetrated in Darfur and, more recently, in the Nuba mountains.

The noble choice of diplomacy over invasion has so far resulted in positive outcomes. The Bush administration is proud to have helped achieve the Comprehensive Peace Agreement, which brought the longest-running African civil war to an end. The peace treaty included the promise of six years of autonomy, followed by the possibility of a referendum on independence. Last January, Southern Sudanese and the world rejoiced as voters cast their ballots without fear and a nearly unanimous majority voted in favor for complete independence. Since the results, tensions have emerged, such as the division of oil revenues and the region of Abyei, but thanks to well-preserved international relations these disputes are being resolved.

Today, the Republic of Southern Sudan has become the 196th country in the world. Yet, this does not mean everything is over; to the contrary, this is only the beginning for a country plagued with deep-rooted conflicts. However, the accomplishments in Sudan demonstrate that relative peace is possible through effective diplomatic pressure rather than irrational military intervention. Though calamity often provokes the emotions to a retaliatory response, the many tragedies of the world are more effectually met by a proactive, calculated peace-seeking process.

Roger Mitchell

2 Corinthians 5: 20