WILLisms.com: Twilight Zone Economics.

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Twilight Zone Economics.

Forty-six years ago, almost to the day, an episode of The Twilight Zone, "The Man in the Bottle," aired on television. This past week, it aired again on the SciFi network and was captured by my TiVo.

The episode is a basic "genie in a bottle" premise, where an indebted pawnbroker-- out of pity-- buys a worthless wine bottle from a desperate old lady for a dollar, then discovers a wish-granting genie within. Somewhat predictably, the wishes make him worse rather than better off, and he ends up having to use his fourth and final wish to make it all go back to normal.

The second wish was a wish for a million dollars. Cash. On the floor of the shop.

Granted.

The pawnbroker then eagerly gives away nearly 60,000 dollars to individuals, one after another, including neighbors, a priest, friends, and such, before planning to travel extensively with his wife.

Suddenly, an IRS agent enters his shop, calculates the tax burden on the million dollars, and bursts the pawnbroker's gleeful bubble. The tax bill was somewhere around $910,000, plus 30 thousand more for state and local taxes.

The pawnbroker counts his remaining cash. Having already given away tens of thousands, the remaining money is barely enough to cover the $940K tax bill, with just five dollars left over.

This episode aired in early October of 1960, just under a month before John Fitzgerald Kennedy-- a Democrat, no less-- was elected.

Shortly after taking office, JFK cut the top marginal tax rate down from more than 90% to 70%. On cutting taxes, Kennedy noted:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

Jack Kennedy cut taxes, and tax revenues did not fall. Oh, no. The economy flourished and tax revenues climbed 62% over the course of the following seven years, from $94 billion to $153 billion.

In a recent conversation with a politically confused 20-something, I brought up the fact that Ronald Reagan cut the top marginal income tax rate from 70% to around 50%. And that thanks to Republicans in more recent years, the top marginal rate is half of what it was when Reagan took office. If Democrats had their way, I asserted, we'd see rates for "the rich" up in that range in a hurry.

She was incredulous.

She just plain didn't believe that the top marginal income tax rate was ever 70%. So I told her that not only was there a 70% tax rate, there was actually a 90+ percent tax rate at one point in our nation's history. In our parents' lifetimes, even, not that long ago. She thought I was just exaggerating to prove a point.

Wrong.

It really happened. It was a nightmarish, Twilight Zone-worthy part of our economic history, but it definitely happened. And although it's somewhat cliche to say this, those who fail to understand the lessons of history-- even recent history, for Pete's sake-- are destined to repeat some of history's worst mistakes.

Listen up, folks.

Democrats can't win either chamber of Congress this year, because they would most certainly allow President Bush's remarkably successful tax cuts to expire. Bush simply can't veto an expiration of tax relief. If Democrats control the House and let tax relief expire, it expires. Period.

Meanwhile, if we forget or reject the wisdom of John F. Kennedy on taxes, we're missing out on an opportunity to enhance prosperity for all, improving standards of living across the board, boosting national security, and delaying for a bit some of the demographic timebombs (like Social Security) headed our way.

Make no mistake, if Democrats were to hypothetically wind up controlling the legislative and executive branches, they would drastically raise taxes. If Democrats somehow wind up with even one camera of our bicameral Congress, every single American-- especially the middle class-- can expect a higher tax burden.

Imagine that it's April of 2007. Just hypothetically. Look down at your tax statement. Do you really want it to be substantially higher-- maybe to the tune of thousands of dollars higher-- than it was in April of 2006?

Of course not. This election is about taxes and terrorism. On both issues, Democrats want to take us "into another dimension, a dimension not only of sight and sound, but of mind. A journey into a not-so-wonderous land of imagination. Next stop, The Twilight Zone."

Posted by Will Franklin · 17 October 2006 12:30 AM

Comments

Imagining a 90+% tax rate is sort like imagining being a 'guest' in a Saddam Hussein rape room. Yes, intellectually you can admit that such a thing is possible, nay, has actually happened.

But you just can't imagine it happening to YOU.

At least I can't. A 90% income tax bracket.

My mind boggles... and then rejecting it as too ugly it moves on.

I don't expect the Democrats to enact a 90% tax bracket of course, but even letting the current tax levels rise back to the levels of the Clinton Era would kill our current economy. I wonder how much of our Stock Market is being held down due to fear of just this outcome?

And how big will the bounce be when the Republicans retain both houses!

Posted by: Mr. Michael at October 17, 2006 01:08 AM

I wish I could have some wishes...!

Posted by: zsa zsa at October 17, 2006 10:18 AM

Do we have enough points to plot the Laffer curve yet? My only complaint is that we continue to move farther from a flat tax.

Posted by: JG at October 17, 2006 10:23 AM

I like distilling things down to simple terms, because that is the only way to get people to understand. So, I like your low-tax/high-tax dichotomy. Here's another, not quite as beautifully simple, but: The Democrats have framed politics around the question "What will the government do? The question needs to be, "How is the government making this situation worse?"

Since 1932, we have framed nearly everything around the former, even though millions of us, at least in some particulars, know that the latter is more in line with reality.

Posted by: Michael Adams at October 17, 2006 11:49 AM

I'd hardly consider the democrats desire to balance the budget via raising the taxes on the top of the top to be on par with the 94% tax rate of yesteryear.

besides, as you point out JFK was the one who got the ball rolling in the right direction.

Posted by: lester at October 17, 2006 03:15 PM

JFK and the Democrats of today are not even close!...

Posted by: zsa zsa at October 17, 2006 03:20 PM

"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."

-Winston chuchill

BINGO!

Posted by: christian at October 17, 2006 04:05 PM

You bring up some excellent points and something worth considering. Of course the Republicans can't seem to reign in their deficit spending, so I think one could argue that neither party is fiscally responsible, but the Twilight Zone does highlight the dangers of over taxing. My answer, Vote Libertarian and kick all the turkeys out of congress.

Posted by: Davis Freeberg at October 17, 2006 05:17 PM

I keep seeing that an average family of 4 making xx will see their tax bill rise yy if the current breaks are allowed to expire in 2010 (or whenever). But I like seeing the work behind this... has anyone found some place that actually breaks this down and shows how different numbers on the increase are arrived at?

Posted by: ken at October 17, 2006 06:33 PM

Kennedy was correct at the time that taxes were too high at the time. However, it is not a fair comparison to say that that logic works in all situations. The current tax rate for the Top 1% of income earners is 30% -LINK . This is a far cry from 90%.Another Article

Addressing taxes, revenues and spending is a more complicated matter to be addressed in a single post but here are a few thoughts.

Tax Rollbacks

If you were to rollback the tax cuts. That revenue can help pay for the many initiatives that have been enacted in the last 6 years: War In Iraq, Immigration Enforcement, Medicare Prescription, Homeland Security, etc.

Taxes and Federal Revenues

Recent studies from bipartison organizations have illustrated that the increased revenues purported from tax cuts DO NOT PAY for themselves.
LINK
The article above contains documentation to answer the latest tax cut myths.

Balancing the Budget

This has to be done by either increasing revenues or reducing spending. Preferably a combination of both. The government always has a hard time reducing or controlling spending regardless of which party is in control.

Checks And Balances

Let's face it. The best economic times in recent years that our country had were when different parties controlled the Whitehouse and Congress; Reagan and Clinton. When this happens, both parties tend to be more moderate and govern toward the middle. Some examples of these successes are the Social Security reform in the early 80's and the balanced budgeting of the 90's. These were a result of both parties keeping each other in check.

If anything the two parties need each other to advance both of their agendas. Most importantly, they need each other to make sure that the rule of law applies to everyone, not just those of the opposite party.

Posted by: JG at October 18, 2006 01:02 PM

taxes are irrelevent unless theyare super high like they are in germany or something. the issue that needs adressing is spending. our budget this year is 2.7 trillion dollars. I could cut the taxes down to .2 percent if I borrowed 2.6 trillion dollars.

the fact that we have a budget that big and that we are losig our civil liberties is no coincidence.

Posted by: lester at October 18, 2006 01:49 PM

And the lion's share of the US Budget? Entitlement programs.

Good luck reigning those in.

Posted by: Hoodlumman at October 19, 2006 05:34 PM