Which do you think is worse for the economy: politicians or higher taxes? How about for the deficit? In the years ahead, we will hear plenty about all three. But the question remains the same: will raising tax rates now improve the outlook for either the economy or the deficit? Or will they make matters worse for both? John Maynard Keynes would have some interesting advice for America today on those questions.

 

Before we get to Keynes, it must plainly be said that economics gets a bum rap. It really is not that hard to understand. Two simple economic concepts are often lost in the shuffle. Here they are.

 

The First Concept: The more something costs, the less of it you get. Higher priced cars sell less than lower prices cars largely because of price. The same concept applies to jobs. The more jobs cost, the less of them we get as a society. Think ObamaCare and companies refusing to hire in the face of those higher costs.

 

Importantly, and largely not understood by most, that same concept applies to income. The higher government prices income, i.e. the higher the income/corporate tax rate, the less income you see. Historically, people have done many things to avoid taxes including move, barter, hide income, defer investment and take less risk, i.e. they decide not to try to make money. Ask Steve Wynn about that. In short, if you raise taxes enough, you indeed have the power to destroy as John Marshall said long ago.

 

A Second, Related Concept: If the government takes your money, you don’t have it. You may chuckle at that – but you would be surprised how many politicians don’t believe it...