Monday, January 3, 2011

Happy New Year

This is my Knoxville News-Sentinel article from January 2.

Happy New Year. The new year's best news is that the 111th Congress is gone with its rapacious appetite for spending and job destruction.

Members of the Democrat-led Congress increased minimum wages - which always destroys jobs - enacted health care "reform" and tried to pass cap and trade along with myriad other legislation. Its last gasp was to try to pass an omnibus $1 trillion spending bill laden with the type of pork that has helped create the largest debt burden in history.

On its way out, Congress also extended the Bush tax cuts while also extending unemployment benefits. During debate on the two year tax-cut extension, we were treated to the administration arguing the absurdity that unemployment benefits actually stimulated the economy. Few people actually believed this nonsense and rightly so.

It only reinforced the belief that we are governed by fools. We are better off that many of this bunch of incompetents were voted out of office. We also had politicians from both parties arguing that the tax-cut extension was stimulative - also an absurdity. How the preservation of the status quo stimulates the economy was never explained.

It can't be.

Since job creation has been hampered by uncertainty, the extension of the tax cuts for only two years will do nothing to create jobs. Rather, the tax cuts should have been made permanent and health care "reform" should have been repealed. That would have been stimulative. What was clear is a reiteration that the purpose of taxes is not primarily to raise revenue but rather to reward and to punish (one of Harold Black's laws).

It is ironic that regardless of how politicians manipulate the tax code in general, the same percentage of revenues flows to the government. This is Hauser's law. The government gets around 19 percent of gross domestic product regardless of the tax code. The difference is that when marginal rates are increased (in order to punish the "rich"), GDP falls and the government gets 19 percent of a smaller GDP.

When marginal rates are decreased, the government still gets 19 percent but of a larger pie, which actually results in a greater total amount of tax revenues collected. So raising taxes on the "rich" is counterproductive and cutting taxes is stimulative.

Most of the "rich" that I know did not inherit their wealth and got wealthy by being creative and hardworking. I thought this was the American dream. Yet they are subjected to scorn when they should be lauded. Do these politicians want all of us to be poor instead? I, for one, have never understood why instead of encouraging the group that is highly productive, innovative and the creator of jobs, so many politicians do the opposite.

I know it's too much to ask for, but my wish for the new year is for a Congress that creates an environment that encourages and rewards risk-taking, creativity, unleashes market forces that will lead to sustained economic growth. In so doing, it will create more rich taxpayers, grow the economy and make us all better off.

Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He can be reached at

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