Taxing the Rich is Really Taxing All of U.S. (Part II)

In the Wall Street Journal’s “Review and Outlook” section (The 2% Illusion, February 26, 2009), the WSJ editors estimate that, based on 2006 tax data (the most recent available), that raising the tax rate to 100% on all income over $500,000 on the wealthiest 2% of all Americans would generate an estimated $1.3T in “revenue” to the government. Further, the WSJ estimates that if all the income generated by Americans earning over $75,000 were taxed at 100%, it would generate about $4T, which is what the Congress proposes to spend in fiscal 2010. While this is an interesting analysis, it is immaterial because it wrongly assumes that Americans will continue to work simply to pay money to the federal government.

In 1989, then Senator Bob Packwood requested that the Joint Committee on Taxation estimate the revenues that would be generated on all Americans earning more than $200,000. The JTC estimated the “revenue” to be $440B over a three year period. This was enough to balance the budget. Sen. Packwood was shocked at this analysis: “Our models assume that people will work forever to pay all of their money to the government. Clearly anyone in their right mind will not.” Sen. Packwood had discovered the principle of the Laffer curve: there is a point beyond which an increase in tax rates causes tax payers to evade taxes, stop working, and stop investing. Reagan understood this principle. By reducing personal, corporate, dividend, and capital gains taxes, he created the longest sustained period of prosperity in the history of the United States. After Reagan reduced taxes in the 1982 – 1986 timeframe, the tax rates have remained relatively unchanged, except for hikes by George H.W. Bush and Bill Clinton. The effect of this long term tax rate reduction, over the period 1982 to 2005, includes:

· Over Reagan’s term, the stock market more than tripled to 3,000. At the height of the George W. Bush term, the market reached 12,500.
· Between 1982 and 2000, stock values soared by 12% per year.
· The net worth of American households increased by $30T.
· The number of Americans owning stock increased from 16% to 50%, investing the average American in the ownership of American business.
· Tax revenues to the Federal government doubled from $1.2T to $2.5T.
· The percentage of tax revenues paid: (1) by the richest 5% has increased from 38% to 60% and (2) by the richest 10% from 48% to 71%.
· The percentage of tax revenues paid by the bottom 50% have dropped from 8% to 3%.
· From 1981 through 2007, the United States was a net importer of $5.2T in capital.

Liberals need to disabuse themselves of the idea that tax rate reductions result in deficits. In fact, tax rate reductions result in increased revenue to the Treasury, capital formation, and increased personal wealth of the average American. Deficits are created by SPENDING MORE THAN THE REVENUE YOU RECEIVE.

From a financial perspective, spending not tax rates is the problem. But this is not the problem the social democrats are trying to solve. They want to buy votes and that takes more money than the American taxpayer can generate.