The great debt default “crisis” is over- for now. It seems everyone is mad, or at least not happy, about both the outcome and the way we got there. It was great political theater that the American people seemed to have hated.

But one thing that struck me during all the talk by the politicians and the media (that no one seems to have noticed) was a subtle change in the political lexicon: The use of the word “revenue”.

A “balanced approach” to the debt crisis, according to President Obama (and all his friends in the media), required “cuts” in spending and increases in “revenue”. This certainly sounds reasonable on the face of it. There’s just one problem with the assertion, and that is that the words used in it don’t reflect what is really meant. It is deception of the first order.

For years they’ve been referring to reductions in the rate of growth as “cuts”. It is a great way to fool a public that isn’t paying much attention. On this score, however, people are starting to catch on.

But the use of the word “revenue” as synonymous with “tax increase” is a new device. The implication is clear: Tax increases increase revenues.

So what’s wrong with that?

Let’s say that you don’t buy the supply side argument that low tax rates increase economic growth and therefore increase tax revenues. Maybe you think Arthur Laffer is a raving lunatic. Okay, so how should higher tax rates be viewed? Should they be viewed as having no negative effect upon tax revenues as well?

That’s the view in Washington, D.C. It’s known as static analysis or static scoring. It takes no consideration of dynamic forces whatsoever. If they calculate tax revenues against an income source, they assume the income remains the same regardless of the rate at which it is taxed. Or, if individuals and corporations buy high priced goods, it is assumed that they will continue to buy them regardless of the tax consequences. This is just foolishness, and the quintessential example of this was the luxury tax of 1991. Neal Boortz explains it this way:

Back in 1990, George H. W. Bush passed a budget, which included a “luxury tax” on yachts over $100,000 in addition to jewelry, furs, etc.  At the time, the Joint Committee on Taxation believed that in 1991 it would be able to rack up $31 million from these luxury taxes.  What was reality?  They collected just $16 million.  Oops.  You see, people changed their behavior in response to new tax laws.

So the “revenue” they got was half of what they projected. And what were the net economic effects of this law? George Will summarized it as follows:

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

The oft repeated assertion that our situation required “cuts” in spending and increases in “revenue” was simply a well crafted lie. There were no cuts, and revenues were not really contemplated at all. Tax increases were. They are two different things.

By the way, in the twenty years since the luxury tax went into effect (it was subsequently repealed) the American yacht building industry has never really recovered.

 

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