Lower Taxes Lead to Greater Revenue

I’ve been leisurely going through Hillsdale College’s free online American Heritage course. The other day I was listening to lecture 4, “The American Founding,” when I made a connection I hadn’t before.

The lecture is a detailed tracing of the movement from being loyal British citizens, asserting their traditional rights, to being independent peoples with natural rights. But there’s a story along the way, about taxes and duties.

For about four decades, the Whigs had been in power in the British Parliament, and they had lived by the philosophy of, “let sleeping dogs lie,” don’t upset what’s basically working. And that meant they had left the colonies mostly to rule themselves. There were governors, but the governors only got paid when the colonial assemblies voted to pay them. And Britain was three months away. So the colonists were pretty used to being left alone. 

But then a new prime minister comes in and starts to be concerned about those colonists getting too independent, and devises ways to crack down on them. I’ll let Dr. Paul Rahe tell this part (starting at 19:00 minutes into the video):

One of the things he does in April 1764, George Grenville, is to supplant the Molasses Act, which was designed to sort of ban molasses from America, with the Sugar Act. And it reduces the duties—the old duties had been set so high that no one could buy anything—so they cut the duties. In cutting the duties they were aiming at a revenue. And so the discontent in America begins with a tax cut, objections to a tax cut.

Well, the original tax was never paid, because it was so high it couldn’t be paid. The cut means that the British are going to seek revenue from the Americans in their own land. And the Americans respond to this with “no taxation without representation,” and they’re not represented in Parliament.

They tighten up the activities of the vice admiralty courts. The Americans were very efficient smugglers. One of the reasons they didn’t object to the Molasses Act is they smuggled molasses in and just skipped past the act. They’re going to tighten the vice admiralty courts so they can hammer these people. Then the Stamp Acts follow in 1965. The colonists are caught flat-footed. For forty-one years they’ve been left to their own devices, and suddenly there’s interference, and suddenly taxes are being imposed upon them, and there have never been taxes on them before

So here is something that governments knew back in the 1700s: higher taxes don’t mean more revenue; you get more revenue when you lower the taxes.

That’s the Laffer Curve, described by economist Art Laffer just forty years ago.

The Laffer Curve
from "The Laffer Curve: Past, Present, and Future," 2004

In short, there’s a point at which you can maximize revenue (if that is your goal—and it is often the goal of governments), and if you raise taxes above that point, the revenue will decrease. Because people avoid paying the tax if it is perceived as confiscatory.

Apparently the early colonists had no qualms about ignoring ridiculously high taxes, or duties (there are differences, but we’ll deal with them as similar enough for our purposes) by smuggling instead of obeying the British-imposed laws. In our day there might be other methods—moving a business out of the country, giving money to children in a trust where it can’t be touched, investing in times and ways that avoid tax, maybe even avoiding earning income over a certain level.

When taxes fall back into the range that people feel is tolerable, they start putting their money to use again, risking the need to pay the tax, because it’s worth paying in order to accomplish various personal goals.

That’s what happened when Reagan lowered to upper tax rate from 70% to 28%, which led us out of the Carter malaise and into a couple of decades of growth.

So, you’d think that if government officials really had the goal of raising revenue, they would find that sweet spot and use it. But they don’t. So they must have some other goal in mind—like appearing to care about the poor by confiscating from the wealthy,so they can get votes to retain their power.

Confiscatory taxes aren't good for a country. (Note: God asks for a flat 10%, given willingly, and maybe some extra offerings for the poor. Does government deserve more than God?) People take it personally when someone forcibly takes the fruits of their labors to use it for some other purpose. As John Locke put it, back in the day, “For what property have I in that which another may by right take when it pleases himself?”

If we want prosperity and growth in the economy, the way to do that is to set people free in the market, to earn what they can, and keep what they earn. You won’t get equal outcomes, but you’ll get better outcomes for everybody who participates.

Family Ties to Economics

We’ve talked here before about the formula for success in America (which I wrote about here and here):

1.         Don’t have sex before age 20.

2.         Don’t have sex until after marriage.

3.         Stay married.

4.         Obtain at least a high school diploma.

I first had this formula spelled out in a speech from Richard Wilkins in 2001, the first time I met him. While going through various tributes following his early death (this is a good one, from Sharon Slater, who worked with him for Family Watch International), I found a link to one of his last speeches (full speech here) Richard Wilkins was the keynote speaker at the June 2012 UN event Standing for the Family: The Family in the Context of Human Rights. The speech is called “The Family as the Cradle of International Human Rights,” and again he asserts that the necessary solution to poverty and other social and economic issues worldwide depends on strengthening marriage and family. As always, it is clearly laid out and well documented.

He points out the founding UN documents that validate the family as the basic unit of society, and then laments the failure to abide by those founding principles.

During the past 65 years there has been great (and laudable) progress in individual rights and freedom, particularly with regard to equality for women. But the family—and the associated civic virtues of hard work, tolerance, patience, kindness, forbearance and forgiveness that are taught to children by wise and loving parents—has been ignored. It is well past time for the international community to acknowledge the fundamental roles played by the family and to take appropriate action to strengthen and support the family.

He spends the body of the piece outlining the specific benefits to men, women, and children—and to society as a whole—provided by marriage and family, well-documented by mounting social research. He then outlines social problems stemming directly from family breakdown. And ends with a call to strengthen family:

Because families are the fundamental unit of society, governments and other social assistance actors should not bypass the unit that can best strengthen society. Fathers and mothers, by and large, love their children. Policies and assistance that permit fathers and mothers to work together to strengthen their families to improve the condition of their children will not only be more successful than other possible approaches, they will strengthen society itself. By building a healthy family, we build a healthy society and—ultimately—a healthy world.

In the shadow of some looming economic catastrophes in our own country, I think we need to make the connection to family breakdown as the root cause and stronger families as the ultimate only solution.

Paul Rahe
Photo from Uncommon Knowledge interview

While I was thinking this, I happened to be doing a little catch-up watching of things I got behind on, and tuned in to Glenn Beck’s November 30^th show—last Friday. Glenn wasn’t there that day. BYU History Professor Paul Kerry  hosted, and his  main guest was Professor Paul Rahe of Hillsdale College (I recognized him from Week 3: “The Greek Miracle,” from Hillsdale’s free online History 101 course). Much of the hour talked about the need for a long-term view, and what perpetuates that view. Family is one of those things. Starting at about 21 minutes in, the discussion gets somewhat specific:

Paul Rahe: Let me give you some statistics that I think will shock you and surprise you. In 1940 what was the rate of out-of-wedlock births, in other words the percentage of children born who were not born to people who were already married? The answer is somewhere between 2 and 3%. That was true in 1950,2-3%. It went up to 5%, a shocking number, in 1960. And, among African-Americans, it went considerably higher than that, to about 12%, which caused Daniel Patrick Moynihan, who was an assistant secretary of labor, to work on the so-called Moynihan report about the crisis of black families.

Paul Kerry: And a Democrat as well…

Paul Rahe: Yes. By 1980 it was 18.4%. Last year it was 39.6%. Now, think about that. We are approaching a situation in which half of the children born in the United States are born to young women who are not married. This is a very good example of a lack of long-term planning. Because they’re taking on heavy responsibilities that it’s hard enough for two parents to manage, especially with one working full time and the other at home (which was the old pattern) to manage. And they’re doing this without thinking.

Now, it’s even worse than I say. Because, if you go back to 1940, there’s almost no form of contraception available. So, in the absence of contraception, the out-of-wedlock birthrate was 2-3%. With the presence of contraception, it’s 39.6%. And I’ve left abortion out of the picture. In 1940 there are almost no abortions; last year in the United States there were three-quarters of a million abortions. There have been 50 million abortions since 1973.

So the pattern, which is among young people—because 50-year-olds aren’t having this problem, since they’re not giving birth—the problem is a lack of impulse control. The problem is a lack of long-term planning. The problem is that a moral revolution has taken place.

So a question you  might want to ask yourself is, can a republic sustain itself in a world in which people are acting on impulse and irresponsibly—and I say irresponsibly, because there are other human being involved, not only the sexual partner but the offspring—can a republic be sustained in those circumstances? Because the women who have children out of wedlock are in fact going to be dependents on the state. And what they’re going to do is call upon other people to pay their bills, to take care of them. Not the father of the child, but welfare, food stamps, things along those lines.

It was a nice connecting of the dots. Who teaches impulse control and encourages a long-term outlook that helps individuals and communities? Families do that. Who does it in broken homes or single-parent households? No one. Especially if the broken family situation happened because of choosing short-term impulse over long-term perspective. In those cases the burden to teach the values falls on someone who does not hold those values.

The solution to economic problems is not to forcibly take income from successful people and hand it unearned to people whose behavior led to dire circumstances; the solution is to strengthen families, where the formula for success is taught. A backup is for churches and schools to also teach the values traditionally inculcated in families, rather than working against them. The social problems caused by an out-of-wedlock birthrate of 2-3% are much easier for society to solve than the overwhelming 39.6% rate. Too many problems, and too few successful society members to make up for the problems.

We know the formula for success. We know the path to take. Some of us will take that path no matter what. The question is, why isn’t that the direction followed by everyone who ever sought to be a leader? Because a leader moving people in any other direction cannot lead to success.