October 8 2012

High Tax Rates Will Never Raise Enough Revenue to Balance the Budget or Create Jobs

Vicki E. Alger

A recent Manhattan Institute analysis by Stephen Moore, Senior Economics Writer, Wall Street Journal Editorial Board, tackles the myths perpetuating letting the Bush tax cuts expire next year. In addition to that effective tax increase, according to Moore:

The Obamacare law also raises tax rates on wealthy individuals by an additional 3.8 percentage points next year. President Obama and others in Congress argue that these higher tax rates are justified because of the growing consensus that the rich don’t pay their fair share of taxes. Unless we do something to spread the burden more equitably, the argument goes, American society will become more unfair and the economy more unsustainable with each passing year. …

In reality, the people at the bottom of the scale have benefited directly and indirectly from every tax rate reduction dating back to Kennedy’s rate reductions in the early 1960s and through the tax cuts adopted early in the administration of George W. Bush. If those lower rates, along with the Alternative Minimum Tax fix, are allowed to expire, the poor will be burdened even more than the wealthy because the whole economic pie will shrink. …

At stake in the current tax debate in Washington are not only marginal income-tax rates but the tax on capital gains and dividends. Federal taxes are already scheduled to rise by about $700 billion over the next ten years to finance the Patient Protection and Affordable Care Act. In short, Americans face the largest cumulative tax increase since the end of World War II…

Moore also tackles the leading myths behind the Obama administration’s tax “fairness” rhetoric with some salient facts, including:

  • The U.S. gets 45 percent of its total federal taxes from the top 10 percent of tax filers, whereas the average for industrialized nations is 32 percent.
  • In 2007, the richest 3 percent of Americans contributed a larger share of tax revenues than they have in any year since 1960. For more than half its income, the federal government relies on what it takes from just that 3 percent.
  • In the early 1960s, the highest income-tax rate was 91 percent. That rate was slashed to 70 percent during the Kennedy administration and remained there until 1981. President Reagan slashed the top tax rate to 50 percent, then to 28 percent in 1986. Even though the tax rate fell by more than half, total tax receipts in the 1980s increased, from $517 billion in 1981 to $1,030 billion in 1990, reflecting strong growth of the economy. In view of the results, taxes also appear to have become fairer: since the late 1970s, even as tax rates fell by half, the amount of taxes paid by the wealthy, and their percentage of total income taxes paid, increased vastly.

As Moore concludes, “There is little doubt that government can redistribute wealth…But there is little evidence to suggest that this results in increased economic mobility for the poor,” based on evidence spanning 20 years.

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