Battle4Liberty

Many of the Republican candidates have been chastised because their proposed tax plans will increase the budget deficit. Pundits (and CNBC debate moderators) frequently argue that a net decrease in rates without cutting spending will increase the gap between government revenues and expenditures, thereby increasing the deficit. But this argument is problematic for one key reason.

Economies are dynamic and consist of lots of moving, integrated parts. Because each of these parts influences other parts, it’s inappropriate to assume that changing one of them will not have an effect on the others. Raising the minimum wage provides a good illustration because it prompts companies to hire fewer workers and/or raise prices, thereby increasing unemployment and inflation. Consumers who spend more on these higher-priced products and services have less money to spend elsewhere, thereby hurting other businesses. Those who claim that raising the minimum wage simply lines the pockets of minimum wage workers without considering the negative repercussions in other areas are shortsighted. They are engaging in static analysis—assuming one change will not result in other changes—which is why their conclusions are incorrect.

Economic proposals should be assessed with dynamic analysis so that their long term, multifaceted effects are evaluated. Consider the following principles that support dynamic analysis. I could list more, but these are some of the obvious ones:

1. Simplifying a tax system improves business decision-making because it becomes easier to evaluate the financial pros and cons of each alternative.
2. Lowering the marginal tax rate increases the incentive to produce; in some instances the increased production can more than compensate for the lower rate, and tax revenues can actually increase. This occurred during the Reagan years, as explained in part by the Laffer Curve.
3. Tax incentives/breaks/loopholes provide incentives to individuals and companies to spend less efficiently in order to get the tax benefit. Eliminating these incentives helps all of us make better, more productive decisions. The mortgage tax deduction is a good example because it provides an incentive for each of us to spend more on housing that we otherwise would. Why not buy a bigger house when part of the higher payment can be passed along to other taxpayers?
4. Taxes punish behavior, so they should be applied in the least punitive manner possible. Consider that taxing income punished income generation, while taxing sales punishes consumption. Given a choice, it’s better to tax sales because the alternative to spending is saving, which is also good for the economy.

There are various Republican tax proposals on the table, each of which should be evaluated through dynamic analysis.  Most of them score well along the above criteria because they lower taxes and simplify decision-making. So why do some pundits and voters fail to grasp this? Some can be excused because they don’t know any better, but others see static analysis as a useful shortcut to make a political point. Central planning works well in a static world because its unintended, negative consequences are not considered. Others take a static approach because it can be based in emotions. Responses like “We can’t give tax breaks to the rich” or “All workers deserve a living wage” illustrate the emotional folly of this type of thinking. They work well with the misinformed.

The solution to this problem is simple, but not easy. The next time your leftist friend fails argues for or against a policy without considering its intermediate and long-term economic and social effects, take the time to outline them in detail in detail. I suggest that you keep the discussion as simple as possible and avoid using technical terms like static and dynamic analysis. Remember…the argument for free enterprise solutions always strengthens when long-term effects are considered. Some won’t have the patience to endure a logical discussion that digs deeper than a sound bite. Some will exit the conversation when they begin to see their own ideas beginning to unravel. But a few will see the light, and the extra time is worth it.