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Friday

12

August 2011

Populist Tax Grabs Have Consequences

Written by , Posted in Economics & the Economy, Taxes

Walter Williams provides a much needed history lesson:

President Obama has called for a luxury tax on corporate jets as a means to generate revenue to fight federal deficits. The president’s economic advisers ought to be fired for not telling him that doing so is unwise and counterproductive.

…Let’s look at what happened when one of Obama’s predecessors, George H.W. Bush, signed the Omnibus Budget Reconciliation Act of 1990 and broke his “read my lips” vow not to agree to new taxes.

When Congress imposed a 10 percent luxury tax on yachts, private airplanes and expensive automobiles, Sen. Ted Kennedy, D-Mass., and then-Senate Majority Leader George Mitchell, D-Maine, crowed publicly about how the rich would finally be paying their fair share of taxes.

…Within eight months after the change in the law took effect, Viking Yachts, the largest U.S. yacht manufacturer, laid off 1,140 of its 1,400 employees and closed one of its two manufacturing plants.

Before it was all over, Viking Yachts was down to 68 employees. In the first year, one-third of U.S. yacht-building companies stopped production, and according to a report by the congressional Joint Economic Committee, the industry lost 7,600 jobs.

When it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and material.

…The U.S., which had been a net exporter of yachts, became a net importer as U.S. companies closed. Jobs shifted to companies in Europe and the Bahamas. The U.S. Treasury collected zero revenue from the sales driven overseas.

Incentives matter. People respond to them, and changing incentives will change behavior. Matt Damon thinks this is simplistic MBA thinking, but it’s actually incredibly complex. Understanding human behavior is never simple. What’s simple is pretending that nothing needs to be understood at all, and that legislation can be passed in a vacuum without impacting any factor other than its particular target (typically: tax revenues).

Obama is guilty of this simplistic thinking, and the current state of our economy is a direct result of that deficiency.