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Wednesday, March 18, 2009

Kemp’s Law

Kemp’s Law
Several years back, Jack Kemp made a very wise observation.  I call it Kemp’s Law.  What Jack said was this, “When you subsidize something, you get more of it.  When you tax something, you get less of it.”  You’ll find that this law is universal and immutable.  There are no exceptions.

The more you subsidize something, like non-farming, the more non-farming you get.  The more you tax something, like business success, the less success you have.

I understand that the new Obama tax plan not only calls for higher taxes on those who make more than $250,000 per year, but also plans to limit tax-deductibility on mortgages for anyone who makes $250,000 or more per year.  This plan guarantees that there will be less people making today’s equivalent of $250,000 per year.  Some may say that’s great.  Ah, but there’s a big catch.

When a government engages in massive deficit spending—think bail outs and all sorts of crazy pork projects—it means that we have increased the number of dollars in circulation, chasing the same number of goods and services.  The net result is Carter style inflation.  But Jimmy Carter was a piker.  The kind of deficit spending being engaged in by the Obama Administration will certainly create inflation that puts the Carter years in the shade.

A devalued currency means you and I will be paid more dollars that are worth less.  Soon that $250,000 threshold will be closer to everyone.

Of course, higher taxes do not necessarily mean higher tax revenues.  Taxes have a direct impact on the health of our nation’s economy.  Higher taxes rob entrepreneurs of the capital they need to start new businesses and expand current businesses.  The net result is fewer jobs, higher unemployment, and less tax dollars.  Unemployed people don’t pay taxes.  This follows another law—the law of unintended consequences. 

Higher taxes, especially on businesses and those who invest in businesses, actually drive down tax revenues because they directly hurt corporations who employ people.  Accordingly, both the corporations and the employees pay less or no taxes.

The record shows that the Reagan tax rate reductions actually increased tax revenues by growing the economy.  That’s right.  The positive impact of tax cuts on economic growth actually created more tax revenues.

The Obama plan is the right recipe for turning a modest recession into a massive depression.  Will this President be remembered as the Herbert Hoover or Jimmy Carter of his era? 

Fortunately, this is not 1932.  If the current economy is in a downward death spiral due to out-of-control spending and tax increases heaped upon tax increases, by the time the 2010 midterm elections roll around, the misjudgments, miscalculations and misunderstandings of the Obama Administration will be stopped in favor of common sense.

The outcome of the 2009 off-year elections will send a clear signal as to whether the American people are buying into the redistributionist policies of the Obama Administration.  Meanwhile, hang on!

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