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The Independent Institute
Commentary

Raising Taxes Is No Way To Spur Economy


It’s September, and election season is under way. Marching to the tune of President Obama’s class-based political rhetoric, some candidates for Congress are campaigning on promises to raise taxes significantly on electorally safe targets.

This year’s list of victims includes “the rich,” Wall Street and America’s oil companies.

Those three groups are in Washington’s cross hairs because politicians need ways to generate more revenue—without spoiling their chances at the polls—to pay for the spending spree they have been on since at least the administration of George W. Bush.

According to the Congressional Budget Office, baseline federal outlays have risen by $4.4 trillion (yes, trillion!) in just the past 31 months.

Demonizing Wealth

The rich and Wall Street are both easy targets. Wealth sparks images of Hollywood and corporate excess. Paris Hilton and Bernie Madoff, like Marie Antoinette, would probably advise us to eat cake. In contrast, most Americans cheer genuine economic achievement.

Individual tales of riches based on hard work and innovation rarely make headlines, however.

So when we hear that Washington is considering allowing the Bush-era tax cuts to expire at year-end, raising the burden on households earning more than $250,000, many think: “Why not?”

But the evidence shows that the top 5% of earners now contribute over 50% of the total income taxes collected by the IRS.

Households reporting incomes exceeding $1 million also contribute more than half of all the money donated to charitable organizations.

Moreover, those same rich Americans often start or run the companies that fuel economic growth. We love a good “Horatio Alger” story—individuals willing to take risks, start new businesses, create employment opportunities and reap profits if they succeed. The process is admired, but Washington now wants to punish the results.

America’s oil and gas industry is another political punching-bag, dating back to the Carter administration and before, bolstered by the recent Deepwater Horizon disaster.

Unwilling to break with Beltway tradition, the 111th Congress proposes adding to Big Oil’s tax burden by, among other things, disallowing deductions for income taxes paid to foreign governments.

Despite already being saddled with an effective corporate income tax rate of 48.4%, in consequence paying more into the Treasury than they earn per dollar of sales, America’s oil and gas companies add at least $1 trillion to U.S. GDP and employ over 9 million workers.

The oil and gas industry’s challenge is to extract natural resources in sufficient amounts, and cheaply enough, to be able to profitably supply affordable energy, which is a critical input to almost all economic activity. That is a risky and very expensive undertaking, but one which is no more profitable than the average private business enterprise.

Punishing ‘Big Oil’

Levying additional taxes on that sector will result in a loss of many high-paying jobs and higher energy costs for industrial and household consumers. President Obama’s moratorium on deep-water drilling has already resulted in the loss of 27,000 jobs.

Raising the tax burden on one of the most critical segments of our economy will be felt by everyone, including the owners of businesses both large and small, owners of automobiles and trucks, and homeowners, as investments in energy exploration and development dry up and prices rise.

Risk-taking is essential for economic growth. Investors who gamble on business ventures supply entrepreneurs with the capital needed for starting and expanding their enterprises. Government is unable to do so since it must destroy jobs in the private sector in order to finance its spending programs either by taxing, borrowing, or printing money.

As we shift from a capitalist to a socialist system, it should be no surprise that employment in the public sector is about the only place where employment nowadays is expanding.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Taxing ChoiceFrom William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation? Learn More »»