Democrat Economics 101

   By Donna Cole


 It seems I have caught Ezra Klein at Wonkblog telling a fib. You know Ezra, the liberal economic wunderkind, Democrat business expert (who has never actually worked a day in the business sector), and sometime fill in host for Rachel Maddow's MSNBC show.


 We at MediaPolitical always find it humorous that the only so-called experts on economics, business and regulatory policy, that liberals can put forth are ones who never actually worked in the fields they are supposed to be experts in. They all come from academia, journalism, or some political background. Klein himself has a B.A. in political science, and besides working for Howard Dean's failed presidential bid in 2003 his whole career is in liberal biased journalism and left wing punditry.


 To be fair to Klein here, he is only repeating, and trying to justify, the fib the rest of the Democrats are telling with regards to how many small businesses will be affected by an extension of the Bush tax rates. I am just going to use Klein as an example to show how the whole lot of the Democrats are greatly understating, by knowingly underestimating the truth in this case.


 I use the term "fib" as opposed to outright lie because economic numbers can be fudged in all sorts of ways to fit the narrative you are trying to put forward. So, the figures may be based in something factual, but they are twisted pretty far out of shape in order to support your idea. This is what the Democrats and Klein are doing. Dishonest ? Probably not, at least in a legal sense. Disingenuous ? Yes.


 Klein has a recent blog post asking, "Does raising taxes on the rich hurt small businesses ?" In this piece, he is using a policy brief from the left wing think tank (which claims to be non-partisan) "The Center on Budget and Policy Priorities" to justify raising taxes on the so called rich. This brief is often cited by Democrats, it makes 4 key points. Let's look at them one by one.

1) Relatively few small businesses would be affected. “Allowing the top two marginal tax rates to return to pre-2001 levels as scheduled next year would affect very few small businesses, a recent Treasury Department study found. The study shows that only 2.5 percent of small business owners face the top two rates.”

 So, only 2.5% of small businesses will face the top rates ? The following story is from the Washington Post, "Obama plan to lift top tax rates would plague millions of small businesses, study warns." The story cites a study done by Ernst & Young;

"Democrats say their political rivals have consistently overstated the small business connection to increased tax rates on the rich. Rep. Steny Hoyer (D-Md.) last week pointed to estimates published by the nonpartisan Joint Committee on Taxation that only 3 percent of small business owners who pay pass-through taxes do so in the two highest income brackets."

"The Center on Budget and Policy and the Tax Policy Center have each reported that the percentage of business owners likely affected by the tax hike would be even smaller, as low as 1.5 percent."

"But Denny Dennis, NFIB senior research fellow, says those figures are based on “the absolutely most expansive” definition of small business, which includes marginal and part-time firms with no workers. By looking solely at businesses that have employees, he cited Department of the Treasury data that suggests the percentage of small companies paying the top two rates increases to as high as 24 percent."

 Do you see what liberals are doing here ? They are including businesses that will never hire employees and never earn anywhere near $250K a year in order to drive down the number of overall small businesses that will be affected by a tax rate hike. Of course my housewife neighbor who sells Avon part time is never going to hire anyone and the retired guy down the street who refinishes old furniture in his garage to sell at flea markets is never going to make 250K a year. The liberals are padding the numbers. On to Klein's next point;

2) There’s little historical evidence that cutting taxes on the rich leads to better performance among small businesses "Job creation and economic growth proved significantly stronger following the 1993 tax increases than following the 2001 Bush tax cuts.  Further, small businesses generated jobs at twice the rate during the Clinton years than they did under the Bush tax code.”

 Then he includes the following chart to show this.

 This chart of small business growth is another red herring used by the left. To explain this growth in simple terms (without writing a textbook, I thought about using some GDP growth charts and then I thought I shouldn't go that deep into it), during the 90s, the U.S. economy was transitioning from a production based economy to a service oriented one. In a service based economy, more people are self employed or work for small businesses as opposed to large manufacturing corporations or in management of those firms.


 The 1990's also saw an explosion of easy credit (via Democrat policies to extend credit to low income people) which fueled a release of pent up demand left from the 80's. This access to credit drove a boom in the service industries. This market based on credit was over inflated. In other words, credit drove the growth without the production of wealth to back it up. Where did the wealth go ? To taxes. The growth was artificial because credit has to be repaid at some point. More of credit could have been repaid if the government wouldn't have been taking it via taxes, this also caused the debt bubble to grow larger than it should have. At the time though, people didn't care about high taxes because it went "on the card." That credit bubble extended through the early 2000's and we know what happened when it ran out.


 This all means that small business growth during the 90's was overinflated and the numbers from the 2000's show a correction in this market, or what the real numbers should be. The numbers during the Bush years were also driven down by the amount of business failures because the market left from Clinton's era was glutted and market forces leveled it out. I know, liberals hate when that darn free market picks winners and losers, but they love it when the government does it.


 I'll get back to government choosing winners and losers a little later, but I have one more thing to address before we move on now that I have dispelled the myths about Clinton's tax rates verses small business growth, it is the "red herring" in this whole idea and how lumping the rich and small business together is a sleight of hand done by liberals.


 Did you notice the difference between the point Klein made verses the data used to back it up ?  "There’s little historical evidence that cutting taxes on the rich leads to better performance among small businesses." Then he (the study he cites) used Clinton era small business growth data to somehow prove this. But "the rich" and "small business" are two very different things, liberals do not want to admit so, but it is true. Remember, it is President Obama who has proclaimed that anyone earning over $250K a year is "rich." This is the number all liberals now use as the dividing line between "us and them."


 Sure, cutting Paris Hilton or Warren Buffett's taxes will probably not increase performance among small businesses, but there is plenty of evidence that cutting the taxes on Mary and Joe's restaurant will. There is even more evidence that if you jack up taxes on Mary and Joe, which is what Democrats want to do, that they will not open an another restaurant or hire workers to run a second shift at the first one. Why ? Because the government will have the money they could have used for those things. Speaking of Mary and Joe hiring new workers, here is Klein's 3rd point;

 3) Cutting taxes on small businesses is not likely to increase their hiring.“Until they see a pickup in sales, businesses with excess capacity are unlikely to use the proceeds from any tax cuts to hire more workers or expand capacity further. Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."

 At face value, this one would seem to be pretty easy Econ 101. Except for it is actually more smoke and mirrors. This tax debate we are now having is not about cutting taxes for anyone, it is about leaving the Bush rates in place or jacking up taxes on the so called rich. Here, the authors of this study are mixing together two things to create smoke and Klein is holding up a mirror.


 In a down economy, demand is low because unemployment is high and overall income is down, so production tracks this. If you raise taxes, it will increase the cost of the product and slow demand even more. What you need to do is reverse their statement and ask, "Would raising taxes on small businesses lead to increased hiring ?" That answer, like Econ 101, is easy. No. If you don't believe me, take a look at the Washington Post story about the Ernst & Young study I quoted earlier;

"The findings (of the study) stand in stark contrast to the repeated assurances from Democrats that their proposal would have minimal effect on small business owners. The study also takes into account new taxes on investment income included in the recently upheld health-care reform law."

"Researchers determined the plan would actually subject 2.1 million business owners to higher rates; specifically, those who pay pass-through taxes, like most partnerships, LLCs and S-Corporations. The result, less capital in the hands of business owners and diminished labor supply, would cost the United States an estimated $200 billion in economic output and 710,000 jobs."

"Moreover, business owners and the unemployed won’t be the only ones adversely affected, according to the study, which predicts that employers would also be forced to trim their workers’ wages by 1.8 percent."

“These results may suggest to policy makers that allowing the top tax rates to increase comes with economic consequences. Under the administration’s proposed tax hike, Americans would see fewer jobs and lower wages The administration’s goal is to tax the rich, but the result of the policies will be to stifle job creation and reduce wages — that hurts everyone.”

 Now we move to Klein's last point as to why raising taxes do not hurt small businesses, but in this case, he (like all liberals, including the ones who wrote this study) wants to pick winners and losers;

4) We should worry about young firms more than small firms “There is an emerging consensus among economists that young small firms — not small firms in general — are particularly important ‘job creators.’  A 2010 study finds no systematic relationship between firm size and job growth, after controlling for firms’ age. It thus is important to distinguish between startup businesses, which the study finds ‘contribute substantially to both gross and net job creation’ (as well as to gross job destruction when they fail, as many startups do), and other small businesses, which on average generate no more net job growth than do larger businesses.” (Klein goes on to talk about exempting new start-ups from taxes using this as his basis.)

 I guess these liberal economists (I hesitate to use the term economist at this point because a liberal economist and a kid who flunked 3rd grade math look a lot alike to me ) just figured out that start-up businesses create more growth than established businesses do. This is a real no brainer. But we run into a few problems here.


 Who are most of the people who start-up new businesses ? It is Mary and Joe who open a second restaurant or the owner of Gary's Widget Factory who puts up his cash to open Gary's Wife's Flower Shop. When you are taxing the heck out of them they do not have the money to make the second investment. And when taxes are eating up their profits, they can't get the credit to do it either. The next problem is picking winners and losers in competition, or government interference in the free market.


 What if I have Donna's Fine China Shop, and I am paying X in taxes, so I am charging Y for my fine china ? Then Jane comes along, gets all these tax breaks and can undercut me ? The government sure did help Jane out, but they just put Donna out of business, net job gain zero and actually a loss of tax revenue. It also creates a third problem, why wouldn't I just start a business, take profits for a few years while tax exempt, then close the doors when tax time comes and open a new business again to get the benefits ? These are all problems you have when liberals, via the government through regulation and taxation, interfere in the free market.


 Let's look at the core argument all these wannabe liberal economists like Ezra Klein are making. They are all saying that cutting taxes didn't improve the economy, so raising them wouldn't hurt either because the government spending more money is a good thing and government can make better use of that money than the private sector can.


 To put this idea in a more proper context, take money from those who earned it and give it those who didn't. They are not interesting in creating jobs for those without jobs, or improving the income of those with low wage jobs, because other than government spending, they have no clue how to actually do this. Now we need to look at one more thing. This is another story from the Washington Post, "Ending Bush tax cuts for rich would save about $80 billion in 2013, analysts say." From the story;

"A Republican proposal to preserve tax cuts for the nation’s wealthiest households next year would cost about $80 billion more than a Democratic proposal to extend the cuts solely for middle-class taxpayers, according to official estimates released Thursday."

 This is a constant theme in these liberal stories about taxes. That lower tax rates somehow "cost" the government something. They cost the government nothing, they put money in the taxpayers' pocket. The story continues;

"All told, the Republican measure would add $300 billion to next year’s budget deficit. A competing Democratic proposal to extend the Bush tax cuts only on income under $250,000 would increase the deficit by about $223 billion next year."

 We have a government that already borrows $0.40 cents on every dollar it spends and is over $15 trillion in debt. It has a yearly budget of over $3.5 trillion dollars (not billion, trillion). We have a president whose last budget proposal was so absurd that every senator in his own party, spare one, voted against it (It went down 99 to 1, Sen. Al Frankin). This argument is over a mere $80 billion, raindrops in the bucket, that the study I cited above shows will cause over $200 billion in damage to the economy.


 You want to make up for the "lost" $80 billion ? Cut spending by $80 billion. You want to make up for the "lost" $300 billion due to the Bush tax rates ? Cut spending by $300 billion. You want to stop borrowing $0.40 cents on every dollar ? Cut government spending by 40%. Guess what ? Balancing a budget isn't so hard after all, if your real goal is to control spending and not to constantly increase budgetary baselines to justify tax increases in order to achieve some Marxist goal of societal equality through dragging everyone down to the lowest common denominator.


 This argument has nothing to do with taxation, it is about class warfare, pitting one group of Americans against another. But this is how Democrats win elections after all and Ezra Klein knows this all too well. Everything he writes about economics has nothing to do with economics, it has to do with gaining political power by creating a society based on government dependency and our current president, his party, and liberal supporters, have already done a rather good job of creating this. All one has to do is look at their policies for the proof of how much they really want to grow the economy. I am sure somewhere in atheist heaven Karl Marx and John Keynes are smiling.