Deficits Horrify You? Erase All Taxes On the 1 Percent

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In April of 2013, Apple Computer floated a $17 billion debt offering. It was the biggest non-bank issuance in business history, and Apple was able to borrow the $17 billion at exceedingly low interest rates.

Why was Apple able to borrow so much for so little? We all intuitively know why. All we need to do is look around. Despite their high cost, Apple products (iPhones, iPads, watches, laptops) are increasingly ubiquitous. Apple was able to borrow with ease simply because investors were highly confident that its present and future products would shower it with abundant revenues that would make paying off the $17 billion very simple.

Applied to the individual debtor, the average American has lots of credit card debt, while the average Peruvian does not. Does the relative lack of abundant personal debt in Peru signal a booming economy there versus a looming debt crisis stateside? Quite the opposite. Americans can run up lots of debt precisely because those with dollars to lend see Americans as rather productive in the commercial sense, and thus good for the money borrowed. They don't feel that way about Peruvians.

All of this has relevance given the never-ending obsession of some Americans with federal budget deficits. To the deficit hawks, we're always on the verge of crisis. Debt crises are always around the corner, with some indescribable horror the logical result. Never explained by the hawks is why it would be bad if investors were to put Congress on a diet, but that's a column for another day.

For now, it's worth addressing the deficit obsession. There are many straw men to unearth here, but recently a conservative publication decried GOP presidential candidate Bobby Jindal's proposed tax plan. The magazine referenced a Tax Foundation analysis which asserts that federal revenues would fall by $9 trillion if implemented. The magazine's argument was that this would be unfortunate since our "coming debt crisis is so near." Markets are always pricing in the future, so not addressed in the prediction of a coming "crisis" was why journalists would know what markets plainly do not.  

We've realistically been hearing about looming debt crises all our lives, but assuming the Tax Foundation's modeling is correct, conservative deficit hawks should love the Jindal tax plan. Indeed, if under the Jindal plan revenues really decline by $9 trillion, odds are the federal deficit will decline too. Investors aren't stupid, the market for Treasury debt is very sophisticated and deep, so if Jindal really intends to collapse federal revenues, investors certainly won't line up as eagerly to buy federal debt.

Going back to Apple, if its investors see its record debt as a problem, then the solutions are very simple: it should fire its brilliant product designer in Jony Ive, and follow that by discontinuing the iPhone. If it does, readers can rest assured that Apple won't be able to run up billions in debt anymore, let alone do so cheaply.

Applying this same thinking to the U.S., if deficits terrify us, let's simply tax the 1 percent at a 100 percent rate on both income and capital gains. If so, economic activity in the U.S. will collapse and the U.S.'s ability to run deficits will cease rather quickly. No sane investor is going to buy the debt of a country intent on impoverishing itself by virtue of sidelining its best and brightest.

And if the above sounds too brutal and austere, how about we abolish all taxation on 1 percenter earnings, along with capital gains? If so, future U.S. borrowing will similarly plummet. We know this simply because the top 1 percent of earners account for somewhere in the range of 40% of federal revenues. In that case, if we cease taxing them altogether, debt offerings from the U.S. Treasury will be very unattractive to investors. Future deficits will decline in response. U.S. debt is only attractive (in the way that Apple debt is) insofar as its backed by the economically talented. Ok, so let's cease taxing the economically talented so that investors stop lending to the U.S. Treasury.

It's been suggested that Donald Trump's tax plan will lead to a $10 trillion revenue hole. Ok, but if that's true deficit hawks should love Trump's tax plan precisely because they're into budgetary balance. If Trump's tax cuts are really going to shrink government revenues (shouldn't we members of the right cheer when politicians have less money to spend?) by $10 trillion, odds are investors won't line up to buy Treasury debt so readily.

Rep. Paul Ryan, the newly minted Speaker of the House, says that while he shared most of the late Jack Kemp's economic views, they parted ways on deficits. According to Ryan, "the debt has gotten so big it's growth-retarding." With all due respect to the Speaker, that's backwards. Again, whether individuals, companies or countries, the ability to run up debt is a function of one's ability to pay it back. That we have massive budget deficits in the U.S. isn't a driver of our prosperity, but it is an effect of it.  We have deficits because the Treasury takes in so much in revenue from the productive citizenry.  If not, we wouldn't have deficits.  If it took in lots of revenue, Peru would have trillion dollar deficits too. So would Myanmar.

Probably the best approach to what has become silly is to remind ourselves that governments have no resources. They can only spend what they've taxed or borrowed from us first. In that case, ALL government spending is deficit spending. Since it is, the goal should be to shrink spending as much as possible; deficits or surplus a sideshow. Government is the burdensome barrier to production. Let's shrink it.

As for deficits, in an ideally not-too-distant someday, the deficit hawks who've been predicting doom for decades will acknowledge just how backwards their worries have been. Rich countries, like rich individuals and companies can run up debt. In that case, if deficits truly horrify the confused we should simply zero out taxes on the 1% altogether. When we do, deficits will plummet. Fun for the rest of us will be to witness what new crisis those prone to crying wolf invent.


John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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