Grover Norquist has been catching a lot of heat lately for holding politicians to the pledge they signed not to vote for any net tax increases.
He was the Best Man at the wedding for my first marriage on October 10, 1987.
He may be the smartest political mind I know.
Here’s how his “No Net Tax Increase Pledge” came about.
Way back in 1984 or 1985, I was having dinner with Grover and several others at Gallagher’s on Capitol Hill when he (we) conceived of challenging all federal elected officials and candidates for federal office to sign such a pledge.
Drinks and dinner at Gallagher’s back then with Grover and our little group of pro-freedom activists was a near-nightly event — as none of us were yet married. We’d get together almost nightly to plot and scheme the rollback of socialism and big government, plus tell jokes and laugh a lot.
One of our big complaints was that President Reagan just wasn’t moving fast enough to shrink the federal government back down to Constitutional size — which would mean cutting the size of the federal government by about two-thirds. ”Why isn’t Reagan even trying to eliminate the Departments of Education, Energy, Labor, Commerce, HUD, and much of Health and Human Services?” we’d wonder.
One night, I mentioned to Grover that I grew up in Vermont and New Hampshire.
In the 1970s, New Hampshire had a great conservative governor by the name of Mel Thomson.
This then became a tradition in the state.
After that, you could not hope to win your race for Congress, for Senate, or for the Governorship in New Hampshire without putting your hand on a Bible and pledging never to vote for instituting an income tax or sales tax.
New Hampshire financed its government with a fairly stiff property tax, state-owned liquor stores, and assorted user fees.
New Hampshire has changed a lot since then. People from Massachusetts have since moved into New Hampshire to escape high taxes in Massachusetts — only to vote for Democrats and higher taxes in New Hampshire.
Southern New Hampshire is now a suburb of Boston.
So New Hampshire has become a purple state instead of a solidly red state.
But back in the Mel Thomson days (the 1970s) Dartmouth economics professor Colin Campbell conducted a study comparing the quality of government services in Vermont versus New Hampshire.
The study made sense because the states are mirror images of each other geographically and demographically. But a Vermonter paid 40 percent more taxes on average than a New Hampshirite.
Professor Cambpell’s study found, however, that government services in New Hampshire were superior to Vermont’s. And New Hampshire’s government was collecting more tax revenue.
How can this be?
Well, Professor Campbell concluded that the business climate in New Hampshire was superior to Vermont because of New Hampshire’s low (almost non-existent) taxes.
So, given a choice, why pay 40 percent more in taxes just to live in Vermont?
As a result, business boomed in New Hampshire, and New Hampshire was able to attract triple Vermont’s population.
All this economic activity then generated more tax revenue for the government of New Hampshire to spend on public services.
Grover (at our 1985 dinner at Gallagher’s) was very interested in Governor Mel Thomson’s idea of challenging politicians to take the “No Tax Increase” pledge.
So he developed a similar pledge for federal politicians to sign.
Who would have thought that 1985 dinner conversation at Gallagher’s would have turned into such a political firestorm in 2012?
Of course, no one is required to take this pledge. But if you decline, voters have a right to assume you plan to raise taxes — or, at least, want to keep your options open.
Politicians take Grover’s pledge for one and only one reason — because they believe doing so will help them win their election. So voters have a right to expect their elected representatives to keep their pledge.
Under Grover’s Pledge, you can vote for tax reform that closes loopholes if there is a corresponding decrease in tax rates. What you can’t vote for is a net tax increase.
But as Mel Thomson, JFK, and Ronald Reagan demonstrated — if you cut tax rates, this increases economic activity and economic growth. So there’s almost always an increase in tax revenue for the government. As people get richer, the government gets richer. It’s a win-win proposition.
The logic is this . . .
If taxes are 100 percent, the government will collect no revenue . . . because no one’s going to work if all their earnings are confiscated by taxation. And if taxes are zero, the government collects no revenue either.
No one knows exactly what the optimal level of taxation is to produce the fastest economic growth and most revenue for the government. Regulation also factors into this because regulation acts like a tax.
Grover’s view (and mine) is that we are a long way past this optimal point on the Laffeur Curve.
The burden of government (taxes plus excessive regulation) is deterring business and economic activity — disincentivizing work, production, and risk-taking . . . while incentivizing leisure and sloth.
If you don’t believe me, watch this video . . .
A big reason economic growth in the U.S. has been so slow in recent years is because there are other countries today that are more favorable for business — such as Canada.
Canada recently cut its top corporate tax rate to 15 percent.
The top corporate tax rate in the U.S. is 39.2 percent — now the highest in the developed world.
So why start a business in the United States if you can pay less than half the tax rate by setting up your factory a few miles to the north?
Communist China has also been cutting taxes like crazy lately — on both corporations and individuals.
Well, to spur more economic growth. That’s why.
China’s top corporate tax rate is now 25 percent — 38 percent lower than America’s top corporate tax rate of 39.2 percent. But for qualified enterprises, the top corporate tax rate in China is now 15 percent. No wonder business capital is flowing out of the United States and into Communist China.
Communist China today is a lot less Communist than we are.
In Hong Kong (now part of Communist China) the top corporate tax rate is 16.5 percent.
By the way, two thirds of Britain’s millionaires have pulled a John Galt and left Britain since the introduction of its 50 percent top tax rate.
Grover doesn’t want that to happen to America.
Paul Krugman argued recently in the New York Times that in the 1950s, the top income tax rate was 91 percent for individuals. He notes that the U.S. was then the unrivaled #1 economic superpower in the world.
JFK than cut the top rate to 70 percent. Reagan cut the top rate to 50 percent, then to 28 percent.
What Krugman misses with his 91 percent top tax rate thesis is that we had just emerged from World War Two as the big winner. The rest of the world had been destroyed, for the most part. Then most of the rest of the world was either Communist or Third World.
The U.S. (relatively unscathed by World War II) was just about the only game in town for any kind of capitalism.
The 91 percent top tax rate was a hangover from WWII when we had to fund the big war machine so we could defeat both Hitler and the Japanese.
Because of the huge tax rate in the 1940s and 50s, most corporate executives did not take much in the way of pay. Instead, companies had generous pensions and other befits that were not taxed.
And people tended to stay at the same company for their entire lives because they could not afford to leave their pensions and benefits behind. So employees were, in essence, indentured servants. So that’s not so good if you value freedom.
We actually had much faster economic growth in the 1960s than we had in the 1950s after JFK cut tax rates to a top rate of 70 percent (despite the cost of the Vietnam war and other Cold War costs).
Of course, no one ever paid close to these top rates. They hid the money in their companies and had a lot of deductions and exemptions.
I actually think that, more than the top income tax rates, over-regulation is the much bigger hurdle to starting a business.
Regulations hurt start-up businesses more because they can’t afford the lawyers to make sure they are in compliance. As a result, new business start-ups are almost non-existent today. Small business is always where the new jobs and economic growth come from.
Grover believes (quite common-sensicallly) that the emphasis should be on lightening government’s burden on new business formation and productive activity by lowering tax rates, striking down unnecessary government regulations, and reining in out-of-control federal spending.
That’s what JFK and Reagan did. The result in both cases was economic growth rates of more than four percent per year — more than double the growth rate we are seeing today.
Government at all levels is taking 40 cents out of every dollar earned in America. The federal government is borrowing 42 cents out of every dollar it spends.
Enough is enough. It’s time for government to tighten its belt and to stop strangling the goose (capitalism) that’s laying the golden eggs.
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