Increase Taxes — The Surest Way To Destroy An Economy


Business is not about taxes. It is about making money. A profit. And taxes are about destroying profits.


It seems as if many tax professionals have more sympathy for tax collectors than their clients. Over the last ten years, my eyes have been opened up to the way things really are.


Truth #1. The more the government gets in revenue, the larger the deficit.

The more the government taxes, the more they overspend. Take my home state of Connecticut for example. According to the New York Times, in 1990, the State of Connecticut had a budget deficit of $65 million. and this was after then Gov. Bill O'Neil signed into law — what was then —  the biggest ever tax hike in Connecticut history. 


So then what happened just a year later in 1991? After the O'Neil tax increases? Pick one:

  1.  The budget deficit was quickly closed, the state learned a valuable lesson in restraint.
  2. The budget deficit increased by a factor of 12.


Option 2 is the correct answer:  The budget deficit exploded to from $65 million to $1 billion.


So the solution?


Well, if tax increases increased the budget deficit, then surely more tax increases would increase the budget deficit. Yes, read that again. Because that is precisely what the new governor, Lowell Weicker, did. He implemented a new income tax. 


Can we really be shocked to learn that the deficit that was $1 billion in 1991 has blossomed to even more dizzying heights? This is what we get from the Connecticut legislature:


The more the government taxes, the larger the budget deficit, and the harsher the economic climate, which leads to more tax increases, which leads to larger budget deficits. And on and on. The death spiral will need some sort of economic miracle (they do happen BTW — and we're definitely due)  to avoid an eventual default of public debt.


Truth #2. Deficits are not good.

Can the government jump-start the economy by throwing a lot of other people's money around? The problem with government spending is simple.


"Keynesian theory suffers from a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy. Any money that the government puts in the economy’s right pocket is money that is first removed from the economy’s left pocket."

-Dan Mitchell, 2009


Truth #3. Government spending for the sake of spending is actually pretty stupid

How is the government expected to efficiently allocate scare resources, when for government, resources aren't scarce? There is no effective limit on deficit spending.


Truth #4. Government gets to double, even triple tax everything.

The is only one source of inflation – the increase in money supply. Who increases the money supply? A privately held entity known as the Federal Reserve. As more money is printed for government spending, the value of what is in your bank account is decreased. Inflation is the stealth tax that is rarely talked about.


But that's not the end of it. The government actually taxes this stealth tax as well.


For example, in 1960, Mary Goodwife buys an investment property for $100,000. In 2010, she sell its for $727,807.20. The government will come along and tax the sale of her property claiming that she needs to pay taxes on the $627,807.20 that she profited. But did she really make that much money?


Well there is a reason I said she sold her property for $727,807.20. Because that is exactly how much $100,000 in 1960 dollars is worth in 2010. So even though there was no gain in the property relative to her purchase power, the IRS (and state) can still tax this phantom gain (of course there are ways around this, most notable the 1031 like-kind exchange)


So there's the reality. Now what?

Taxing regimes are at war with prosperity.


Look, nothing is going to change. Some dope will say that we need to sacrifice and increase taxes. Of course governments NEVER sacrifice. They get every thing they need and more.


Every single time governments increase taxes, the problem gets worse. Right now, Connecticut, Congress, are just trying to see how bad they can make it.