Clicking on banner ads enables JWR to constantly improve
Jewish World Review Dec. 18, 2001 / 3 Teves, 5762

Amity Shlaes

Amity Shlaes
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

When it comes to taxes, Washington lawmakers can learn a thing or two from The Honeymooners -- ONE of the best US television clips from the 1950s comes from an episode of Jackie Gleason's The Honeymooners.

In the show titled The Income Tax, Ralph the bus driver thinks aloud about his tax bill. At first he feels resentful. He has been saving his cash for a new bowling ball, not Uncle Sam. But then Ralph considers the state of the world. The show aired as US soldiers were finishing their third bitter winter in Korea. Refugees in Europe were still short of coffee and potatoes. And he changes his mind, breaking into patriotic tears and telling his wife Alice: "Gee, we ought to give all our money to the government."

Wars, more than almost anything, give rise to a willingness to pay taxes. We have the sense that we are ingrates, poor citizens - traitors, in a small way - if we do not accept higher rates in a time of crisis.

This is not necessarily a logical view, as economist David Henderson points out in a wonderful new book put out by this newspaper's sister publishing house, FT/Prentice Hall. In The Joy of Freedom , Mr Henderson makes the case that less government is almost always better. It even fosters peace, or at least a stronger community.

Mr Henderson's chapter on taxation has particular relevance for this new wartime moment. Higher tax rates, he argues, are not efficient and should not necessarily be supported by those of us who want our nations to be able to afford the strongest possible defence.

This may sound counterintuitive. But here's the Henderson explanation: when a government raises taxes, it also does damage to the general economy. That's because taxes generate what economists call a "deadweight loss". The tax system distorts behavior, forcing people to waste time and money on tax avoidance. Instead of devising a new widget, they commit valuable hours to estate planning, or other activities that are a gain to no one, except perhaps tax attorneys.

What's more, Mr Henderson notes, "the deadweight loss from a tax is proportional to the square of the rate". Thus, he argues, doubling a petrol tax to 20 cents from 10 - the sort of thing Western governments start to contemplate during a war in the Middle East - does more than double the deadweight loss. It quadruples the deadweight loss. Raising the marginal rate on an already progressive rate schedule, another war era move beloved of politicians, also generates deadweight exponentially.

The exponential theory of deadweight loss is not new. It dates back to the 1920s, when it was posited by the economist Frank Ramsey. But it has yet to be absorbed by most lawmakers.

The Clinton administration, for example, billed its early 1990s tax increase as small. Yet in work for the National Bureau of Economic Research, Martin Feldstein and Daniel Feenberg reckon the rise deprived the US economy of two dollars of growth for every dollar the Internal Revenue Service got from it.

The implications of the deadweight loss argument for the war are obvious. Nowadays, waging successful wars requires a robust private sector. Boeing and Raytheon need less deadweight, not more, if they are to do the work of building jet fighters and defence systems. Scientists who develop designer antibiotics to combat the next biowar challenge need a lighter burden as well.

When taxes are already at a historic high as a share of gross domestic product, as they are now in the US, the deadweight loss from incremental rate increases are enormous.

Mr Henderson makes his argument from a libertarian point of view. But that does not mean his point does not apply for those who would like to see an increase in defence budgets. In the Henderson scenario, aka supply side economics, a government is most likely to get revenues it desires by lowering tax rates. Lower tax rates will generate higher tax revenues because people will be more willing to work.

Finally, as Mr Henderson points out, undoing "temporary" wartime tax rises is harder than it seems. During the seond world war, the modern income tax was levied broadly in the US for the first time as a contingency step.

But after VE and VJ days, the tax was cut only slightly. That cut was then reversed, with the Korean War, when a nation of loyal Ralphs allowed their lawmakers to raise America's top rate to a confiscatory 91 per cent. And there it stayed, for a number of very long years, until President John F. Kennedy pushed for a law to hack rates back.

At this writing, House and Senate are still haggling over tax cuts. But with the US surplus fast disappearing, and Washington's promise of a long war, a call for some sort of tax increase looks inevitable. Lawmakers in Washington might like to pick up a copy of Mr Henderson's book. In it, they'll find a perfect case that cutting rates is the most patriotic step they could take.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


12/13/01: Bush opens a new era
12/12/01: A flamboyant reversal for the Democratic party
12/06/01: Threat of an oil embargo on the U.S. is a bluff
11/29/01: Which is more important--the war or diplomatic comity?
11/20/01: Unbalanced by a wealth of oil and diamonds
10/17/01: Afghanistan Needs a General MacArthur
09/27/01: The US has gained an understanding of the costs of war for which its European allies have hitherto wished in vain
09/13/01: War against terrorism will rise from the ashes
08/15/01: Geography is no excuse for the state's economic stagnation. Its policymakers should take a leaf from Ireland's book
08/07/01: Teamsters may pay a heavy price for winning its batle in Congress
07/25/01: Towards a patent-free nirvana?
07/17/01: History proves the lasting value of tax cuts
07/10/01: Stem cell research has awakened a bitter debate in Washington but voters care more about other electoral issues
07/03/01: America foots the bill for Europe's largesse
06/26/01: America the litigious, land of the lawyer's fee
06/20/01: Five reasons for gloom about global growth 06/18/01: Show pity for Alice in Tax Wonderland
06/13/01: America must take a French lesson in trade
06/11/01: Time to dream the impossible dream for Iraq
06/07/01: Whatever happened to simple?
06/04/01: When the relationship between companies becomes as close as a marriage, the eventual break-up is often very painful
06/01/01: Loving and hating the Bush tax bill
05/30/01: Will Grisham soon be unemployed? In America's courts these days, there's no room left over for legal fiction
05/22/01: Republicans sample the rhetoric of confidence
05/16/01: Boeing has been promised $60m to site its headquarters in Illinois. The deal looks a poor one for taxpayers
05/14/01: Adam Smith in love
05/09/01: Those rotten Russian capitalists
05/07/01: Why tax havens provide shelter for everyone
05/04/01: Middle classes pay for get-the-rich folly
05/01/01: Money can't buy happiness? Think again.
04/26/01: Calling America's rogues and entrepreneurs
04/19/01: High earners right to feel lonely at the top
04/11/01: The right must learn the comfort of strangers
04/04/01: When domestic law arrives by the back door
03/30/01: A Lexus tax cut suits the jalopy driver
03/27/01: The unchallenged dominance of King Dollar
03/20/01: Natural selection of an intellectual aristocracy
03/16/01: The hidden danger of a regulatory recession
03/14/01: Is the American condition that boring? Why so many Oscar nominated movies aren't set in America
03/07/01: Trampling on the theory of path dependence
03/05/01: Fighting the good fight
03/01/01: It is time for Fannie and Freddie to grow up
02/27/01: IT's important
02/22/01: The guilty conscience of America's millionaires
02/14/01: The benefits of helping the 'rich'
02/09/01: The Danger and Promise of the Bush Schools Plan
02/05/01: Crack and Compassion
01/31/01: Debt is good
01/29/01: Clueless
01/24/01: A gloomy end for a half-hearted undertaking
01/17/01: The challenge of an ally with its own mind
01/15/01: An unexpected American family portrait
01/10/01: A fitting legacy for America's beloved dictator
01/08/01: The trick of tax 'convenience'
01/03/01: Time to stop blaming Greenspan over taxes
12/11/00: So smart they're dumb
12/06/00: How economic bad news came good for Bush
12/04/00: The Boies factor
11/30/00: "The inevitable demands for recounts erupted like acne…"
11/28/00: Fair play and the rules of the electoral game
11/23/00: The shining prospect beyond a cloudy election
11/21/00: Try the Cleveland model
11/16/00: A surprising winner emerges in the US election
11/09/00: Those powerful expats
11/07/00: What's right for America versus what works
11/02/00: Time to turn off big government's autopilot
10/30/00: Canada beating America in financial sensibility
10/26/00: When progressiveness leads to backwardness
10/24/00: The most accurate poll
10/19/00: The Middle East tells us the hawks were right
10/17/00: The split personalities of America's super rich
10/10/00: 'Equity Rights' or Wake up and Smell the Starbucks
10/04/00: Trapped in the basement of global capitalism
09/21/00: The final act of a grand presidential tragedy
09/21/00: Europeans strike back at the fuel tax monster. Should Americans follow?
09/18/00: First steps to success
09/13/00: America rejects the human rights transplant
09/07/00: Minimum wage, maximum cost
09/05/00: Prudent Al Gore plans some serious spending
08/31/00: A revolution fails to bring power to the people
08/28/00: A reali$tic poll
08/21/00: "I Goofed"
08/16/00: Part of the union, but not part of the party
08/09/00: Silicon Alley Secrets
08/02/00: Radical Republicans warm up for Philadelphia
07/31/00: I'll Cry if I Want To
07/27/00: Cold warrior of the new world
07/25/00: The Estate Tax will drop dead
07/18/00: Shooting down the anti-missile defence myths
07/14/00: A convenient punchbag for America's leaders
07/07/00: How to destroy the pharmaceutical industry
07/05/00: Patriots and bleeding hearts
06/30/00: Candidates beware: New Washington consensus on robust growth stands the old wisdom on its head
06/28/00: White America's flight to educational quality
06/26/00: How Hillary inspired the feminist infobabes

© 2001, Financial Times