Arthur Laffer had a piece in the Wall Street Journal last week that should be required reading for all politicians.  I recommend that you read it.  Soak-the-Rich Catch-22

As a bit of a tease, it starts with a quote from John F. Kennedy in 1963:

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.

Politics is about power and power is about the number of voters you can persuade to agree with you.  Politicians like to make you envious of those who have more than you.  Then it is easy to convince you that we can screw them and benefit ourselves.  The only problem is that when you screw the rich, you screw yourself worse.  Politicians today are trying to convince us that the rich should pay more of our tax burden and the best way to make that happen (and to get back at those nasty rich people) is to let the “Bush Tax Cuts” expire.

If we plan to compete in the future with countries like China and India, we need to equalize the cost of labor.  If labor in the United States costs $150 per day and it costs $5 a day in China, how do we make up the 30 times multiple?  The only way is to make our labor more productive than theirs.  To do that we need to increase the skills of the workers, give them better tools, organize them better, or automate and replace 29 laborers with one machine.

Where does the money come from to invest in this education, training, new equipment, etc.?  It comes from investors, not from government handouts.  When investors have money and a stable set of rules to live by, they invest.  When they are heavily taxed or when the rules are changing rapidly, they hold onto their money and wait for a better opportunity.

Today we are in a period where the rules are changing rapidly.  What will be the cost of health care for my employees?  What will be my tax rate on profits?  How much will new regulation cost me to put in a new paint spray booth?  Is it worth risking my hard earned savings to invest in my small business or is it better to just put the money in T-Bills and wait for more stable times to invest?

Today, most investors are sitting on the sidelines, holding cash or T-Bills, rather than investing in businesses.  If the tax rates are allowed to go up in 2011, I think this trend will accelerate.  Where will the money come from to rebuild our infrastructure, to train people for new technology, to add newer and better tools to make workers productivity rise?

My view is that if tax rates are allowed to rise and if governments do not stop changing the rules (health care legislation alone will ad dozens of new agencies and mandates that will drive up costs for employers), I don’t see many people investing in anything but the safest places, like T-Bills.  All that does is draw more capital out of private business, out of the economy.

Do you want to see the economy turn around?  Our government need to do much like Doctors are required by the Hippocratic Oath to, “First, Do no Harm.”  Do not let taxes rise.  Next, control government spending so that it does not cost the Government 2-3% above what banks pay to borrow money.  Banks now pay their depositors between .5 and 1.0% to borrow their money.  The Feds pay almost 3%.  To make a profit, all the banks have to do is borrow from you at under 1% and then earn 3% from secure T-Bills.  Why would they want to lend the money to a business (and take a risk)?

Though it is fashionable to blame Republicans for tax cuts (I would argue that it is idiotic to blame anyone for cutting taxes), the fact is that when less is paid in taxes, there is more for the private sector to invest and many Democrats understand that, too.  I hope that Mr. Obama and the current crowd in Washington see the light and don’t allow taxes to rise and drive the economy to new depths.

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