Fox and Hounds Daily, October 6, 2008

Now that the legislative session is over and Speaker Karen Bass is contemplating her commission on taxation, I want to recommend a piece in the September 25th Sacramento Bee by Jason Clemens of the Pacific Research Institute.

Clemens, a Canadian, tells the tale of how Canada’s left leaning political party pursued a course of reducing spending and at the same time cutting taxes which produced more revenue and dramatically reduced Canada’s budget deficit. What makes this story intriguing is that Canada’s population size is roughly equivalent to California’s and the size of the budget deficit when the new economic policies were implemented was larger than California’s deficit.

This lesson of cutting taxes to bring in more revenue is nearly as old as history itself.

Fourteenth century Arab statesman and historian Ibn Khaldun wrote: “At the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

Before becoming president, Ronald Reagan began one of his radio commentaries with an against-the-grain comment: “Brace yourself. I would like to see the rich pay more tax.” He explained that he wanted to secure more revenue from the richest tax brackets by cutting taxes. Reagan cited figures from the John F. Kennedy tax cuts that a drop in the tax rate from 91 percent to 77 percent actually increased revenue in those tax brackets from $2.5 billion to $4 billion.

More than four decades before Reagan’s commentary, renowned economist John Maynard Keynes saw the futility of struggling to alleviate deficits by increasing already high tax rates: “…given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

With California’s budget crisis comes the opportunity to put this lesson into practice and relieve California of its perennial budget woes.

Joel Fox is editor of Fox & Hounds and President of the Small Business Action Committee