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Prophets & losses: Part II

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By Thomas Sowell
Friday, Feb. 8, 2013, 8:57 p.m.
 

People on both sides of tax issues often speak of such things as a “$300 billion tax increase” or a “$500 billion tax decrease.” That is fine if they're looking back at something that has already happened. But it can be sheer nonsense if they are talking about a proposed increase or decrease in the tax rate.

The government can only raise or lower the rate. Whether the actual tax revenues will go up or down is a matter of prophecy. And these prophecies have been far too wrong far too often to base national policies on them.

When Congress considered raising the capital gains tax rate from 20 percent to 28 percent in 1986, the Congressional Budget Office advised Congress that this would increase the revenue received from that tax. But the Congressional Budget Office was wrong — not simply about the amount of the tax revenue increase but about the fact that the capital gains tax revenue actually fell.

There was nothing unique about this example of tax rates and tax revenues moving in opposite directions from each other. Reductions of the capital gains tax rates in 1978, 1997 and 2003 all led to increased revenues.

The Congressional Budget Office is by no means the only government agency whose prophecies have been grossly unreliable. Anyone who looks at the history of the Federal Reserve will find many painful examples of wrong prophecies that led to policies with bad consequences for the whole economy.

During the 20th century, economic central planning by governments — prophecy at the grandest level — led to so many bad consequences in countries around the world that even most socialist and communist governments abandoned central planning by the end of the century.

The failures of governmental prophecies in so many different contexts cannot be blamed on stupidity. Most of the people who made these prophecies were far more educated than the average person, had far more information at their fingertips and probably had higher IQs as well.

Their intellectual superiority to others may well have given them the confidence to venture into areas where no human being has what it takes to make prophecies that lead to policies overriding the plans and actions of millions of other human beings.

Human beings are going to make errors in any kind of economic or political system. The question is: Which kind of system punishes errors more quickly, and more effectively, in terms of forcing errors to be corrected?

A market economy with many competitors has incentives and constraints that are the opposite of those in a government monopoly. Anyone familiar with the economic history of businesses knows that their mistakes have been common and large. But red ink on the bottom line lets them know that they are going to have to shape up or shut down.

Government agencies face no such constraint. The Federal Reserve can keep making the same mistakes in the next hundred years that it made in its first hundred years.

Elected politicians not only can keep making the same mistakes. They have every incentive to deny that they made a mistake in the first place, since such an admission can end their careers.

That is why these prophets can lead to our losses.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University.

 

 
 


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