During his news con ference yesterday, President Obama re peatedly laid out his case by calling for new taxes on “corporate jets.” The sound bite is designed to seem extremely reasonable. After all, those bankers and hedge-fund managers who can afford to fly around on corporate planes can undoubtedly pay a bit more for the privilege.
We’ve been here before. In the 1990 deal between President George H.W. Bush and a Democratic Congress, yacht owners were the designated villain. Yachts were, after all, owned by “millionaires and billionaires” who didn’t pay their fair share of taxes. Who could object to taxing them a bit more? So Congress passed a 10 percent luxury tax on yachts priced at more than $100,000.
The result was the virtual destruction of the domestic boat-building industry. Sales of luxury boats dropped 70 percent within a year. Several manufacturers went bankrupt. More than 25,000 workers lost their jobs. And because so few boats were sold, the tax didn’t even generate much new revenue.
“Every dollar that the government takes in taxes (or borrows in debt for that matter) is one less dollar that someone has to spend, save or invest.”
At the end of the day, the millionaires and billionaires were still rich. But thousands of hardworking middle-class Americans ended up out of work. The tax was repealed by a lopsided and bipartisan vote in 1993.
The French economist and philosopher Frederic Bastiat addressed Obama’s fallacy some 250 years ago, describing “the seen and the unseen.”
Bastiat referred to the example of a farmer who plans to hire a worker to dig a ditch on his property, but is unable to do so because the money he’d have used to pay the ditch-digger went instead to pay taxes. A government bureaucrat is able to use those taxes to spend on various projects. Of course, everyone can see the results of that spending, which undoubtedly makes the bureaucrat popular. But what goes unseen is the loss suffered by the poor ditch digger.
Obama assumes that if someone is wealthy, his or her money just sits there. In reality, individuals either spend that money or they save and invest it. If they spend it, it helps provide jobs for the people who make and sell whatever it is they buy. If the money is instead saved and invested it provides the capital that is needed to start businesses and hire workers.
Every dollar that the government takes in taxes (or borrows in debt for that matter) is one less dollar that someone has to spend, save or invest. The government can then spend the money on the popular programs that the president repeatedly listed in his news conference: student loans, medical research, Medicare, etc. What can’t be seen is the lost jobs and slower economic growth that result from the higher taxes.
That isn’t to say, as Republicans sometimes claim, that all tax cuts pay for themselves. Nor does it mean that every corporate and individual tax break and loophole is justified. Some, like the ethanol-tax break that Congress repealed recently, are little more than special-interest subsidies disguised as tax cuts. And too much of the tax code is devoted to micromanaging behavior rather than simply raising revenue. Ideally, the tax code should be much flatter, with low marginal rates and few, if any, deductions.
But, for now, Obama should keep in mind the unseen consequences of the tax hikes he recommends — even if he’s only raising taxes on “millionaires and billionaires.”
Class warfare may or may not make for good politics, but it certainly makes for lousy economic policy.