Sunday, August 1, 2010

Spending Too Much or Taxing Too Little?

“You can't tax your way out of a spending problem, you've got to stop spending” New Jersey Governor Chris Christie.
In a nutshell, this is the essence of fiscal responsibility.  It works at all levels.  Whether you are an individual, a family, a company or a government.  Unbridled spending does not lead to successful operations.  This is the essence of the case made by Peggy Noonan in her column yesterday.  It is a winning argument that Republicans can and should be making everywhere.
I have seen this first hand.  Several years ago, I had the opportunity to work for a novel company with a brilliant approach to health care prescription management.  Despite the fact that the idea had enormous value, the leadership of the company spent enormous amounts of money in acquisitions, out of proportion to the revenue that we were generating.  So, in spite of the fact that during my time there, we doubled sales revenue, spending increased by more than 5 times. 
There came a point when the investors stepped in and said “Enough”!  Drastic measures were taken.  Approximately 70% of the staff was let go, much of the leadership was replaced and the company took off in a new direction.
That was personally tragic for me as I was part of the 70%, but in the end, it worked out as the company was focused in a specific area, had modest success and then ended up being acquired by another company with the breakthrough technology being adopted by the acquiring company.
The point is, nothing can exist forever with an imbalance between the revenue coming in and the expenses going out.
Our current government does not seem to get this.  Or if they do, the answer seems to be, “Well let’s raise the revenue”.  Yesterday’s seemed to imply this with their recommendation that we raise taxes.
The problem with this is captured clearly by Governor Christie.  This situation is a result of unprecedented increases in spending without regard for the revenue to pay for it.  Simply raising tax rates may or may not have the desired effect because as Arthur Laffer continuously points out, raising rates do not necessarily lead to a commensurate increase in revenue.  The reason is that taking revenue from the economy, especially when the economy is fragile, often leads to less investment and less economic activity. 
Lower economic activity leads to less prosperity, less prosperity leads to lower tax revenue.  It is a question of simply math, I mean which would you rather have 15% of $1 Million dollars or 20% of $300,000?  If you need help in answering this question, please ask the citizens of California where they took a “soak the rich” attitude to taxation years ago and when the rich stopped being so rich, the entire state became a poster child for lopsided taxation policies combined with spending commitments held hostage by out of control public unions.
The solution is to bring spending under control, encourage the creation of prosperity by adoption of policies that encourage private investment and regulatory policies that encourage individuals to make those investments here, in America.  This is the way to create meaningful jobs that provide dignity and hope.
Let Freedom Ring.

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