The real alternative to small government and low taxes is a more equitable distribution of wealth, Part II.

Yesterday I think I pretty much demolished the ideas that less government is always better and that the private sector can always do things better than government can.  Today, I want to tackle the companion idea that lower taxes are always better.

We currently have historically lower taxes and historically higher debt than at any time since before World War II.  As we have lowered taxes, we have nevertheless kept spending and paid for it by borrowing money.  What would have happened if instead of borrowing that money, we had kept taxes high or not lowered them as much?

To answer this question we have to know two things: who pays the taxes and who lends the money, because the first flow of money will go from those who loaned it to the government to those whose taxes were thereby lowered.

The wealthiest families and individuals and bigger businesses are the ones whose taxes have been lowered the most over the 30-year rein of Reaganism.   That’s just the facts. 

Moreover in theory, lowering taxes alomost always gives more money to the wealthy than to others.  Here’s why: the higher taxes go, the more of total taxes the wealthy should always theoretically pay.  Even when tax rates are flat, the wealthy pay more because they earn and have more.  As we all know, rates are progressive, which means that the more you make, the higher the tax rate.  For example, the highest tax rate before Reagan pushed through his first tax cut was 70% and now it’s 35%.  It is theoretically possible that we could have a tax system in which rates were so regressive (the more you make, the lower the percentage of your income you pay) that the wealthy paid less when taxes were raised, but it would probably first take the installation of a dictatorship.

It’s clear that with the lowering of taxes, in what actually has happened since 1980 and in theory, rich people get the biggest break, which means they have the most extra money to spend.

Now who are the lucky souls who fund the debt that the government floats instead of collecting taxes?  I call them lucky because when they loan the federal government money, they are making the single safest investment that has ever existed in the entire recorded history of humankind: the U.S. Treasury bond!

Why it’s the very same people who got the most extra money from lowered taxes—the wealthy—who buy the bonds.  Sure, people in the middle class and the poor may have a couple of government bonds, but the wealthy own the preponderance of T-bills and other government investments not held by China and other foreign countries.  In other words, under low-tax regimes, instead of wealthy people giving taxes to the government, the government ends up creating safe investment havens for the wealthy, and in the recent past, foreign countries as well.

And who pays the interest?  Future generations do, as interest to the bondholders, which means that the same tax base in future years will not be able to cover as many goods and services for the common good.  If a low-tax regime persists, and remember that except for the boom Clinton years we have had a low-tax regime since 1980, a pernicious double helix is created, as the increase in debt and the decrease in government effectiveness both spiral into a societal dance of death.  It happened in 16th century Spain and if we don’t raise taxes soon, it will happen here.

The rich primarily get the investment income, whereas all of us pay it out, so when we lower taxes and fund the government by borrowing money as Reagan and both Bushes did and, unfortunately, Obama now is still doing, we are making another net transfer of wealth up the economic ladder, this time from the poor and middle classes to the wealthy.

The greatest folly in all of this, of course, is that so much of the current federal deficit was directly caused by the military adventurism of the last 30 years, and specifically the sheer disasters of Iraq and Afghanistan.

I’m not saying that governments should never borrow money and instead fund all operations with taxes.  For example, municipal bonds earmarked to build needed schools and highways make a lot of sense, just as it makes a lot of sense when a business borrows money to build a new factory or improve its computer systems.  And just as some businesses have working lines of capital to provide them with the cash flow they always need, perhaps government also needs a ready source of funds that makes more sense to fund by borrowing instead of taxing.

What I am saying, though, is that when you hear conservatives talk about keeping taxes low or lowering them still more, they are advocating that we create investment opportunities that lead to a mass transfer of wealth from the poor and middle class to the wealthy.