Shattering the Myth That Higher Taxes Can Fix the $40 Trillion National Debt

In June of 1944, American soldiers were storming the beaches of Normandy, single-handedly leading the fight to defeat the Nazis.

Back home, Americans gave everything they had. Some 85 million bought war bonds. The top income tax rate hit 94%, the highest in US history. Even ordinary people paid more and more income tax to support the war effort.

This was the absolute peak of American patriotism and record high tax rates. And yet overall government tax revenue still only came to just 20.5% of GDP.

This matters. In the eight decades since the end of World War II, tax revenue in the United States has averaged between 17% and 18% of GDP… with very little variation.

The low was 14.2% in 1950, coming out of a recession, and the high was 20.0% in 2000, at the peak of the dot-com boom when capital gains tax rates were through the roof.

Yet throughout those eight decades, the overall average has remained quite steady— 17% to 18%… even though corporate and individual tax rates have been all over the board over the same period.

The reason is simple: as tax rates go up and down, people and businesses adjust their behavior. If marginal tax rates skyrocket, people stuff their earnings into tax shelters. Or they defer revenue. Or they come up with any number of ways to legally reduce what they owe.

It’s human nature.

You probably heard that the US national debt just crossed $40 trillion yesterday. And on its current trajectory, there is no end in sight to the growth of that debt.

The federal government now routinely posts ~$2 trillion annual deficits… during periods of relative peace and prosperity.

Plenty of people (especially on the left) believe the answer is to tax the rich: sky-high marginal rates, wealth taxes, etc. But the historical data show that higher tax rates cannot and will not solve the problem.

According to IRS data, imposing a tax rate of 90% on people earning $2MM per year or more would theoretically generate $200 to $300 billion in additional tax revenue.

But remember human nature: people would very quickly change their behavior and restructure their affairs, and so the real additional tax revenue would collapse to less than $50 billion per year.

The same goes for a wealth tax. Charging billionaires and centimillionaires a percentage of their unrealized gains sounds like a nice idea to a socialist. But the consequences would offset most (if not all) of the additional revenue.

If Elon Musk were forced to sell 10% of his stock to pay a wealth tax, the share prices of Tesla and SpaceX would plummet.

Sure, the IRS would collect more money from Musk himself. But, nationwide, overall capital gains tax revenue would fall dramatically. So net tax revenue would barely budge.

The point is there are always consequences to raising taxes: less economic activity, slower growth, and higher unemployment. No country in history has ever taxed its way to prosperity.

What’s crazy is that an economy as large and dynamic as America’s doesn’t even need to run a balanced budget. Even a $1 trillion annual deficit would be OK— and a huge step in the right direction. The national debt would still grow, but as a percentage of GDP, it would shrink.

And it’s not hard to get there. The low-hanging fruit is obvious: the Government Accountability Office, the federal government’s own watchdog, estimates that hundreds of billions of dollars are lost to outright fraud and theft every single year.

Yet Congress doesn’t seem to want to even try to eliminate obvious fraud.

And that’s the easy stuff.

The harder part would be streamlining government operations and cutting waste and inefficiency… which could easily generate hundreds of billions in savings.

Harder still would be reforming entitlements, fixing immigration, and taking a chainsaw to the Code of Federal Regulations… all of which could trim spending and/or grow the economy (and hence increase tax revenue).

Again, the national debt is $40 trillion, yet Congress won’t even do the easy stuff to fix it. Even worse, the media and the courts actively block and obstruct the people who do try.

We can hope that common sense will one day prevail, and that AI and nuclear power will supercharge the US economy to the point where America grows its way out of debt.

But in the meantime, there are now 40 trillion reasons to have a Plan B.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/shattering-the-myth-that-higher-taxes-can-fix-the-40-trillion-national-debt-155653/