Will Higher Tax Rates Balance the Budget?

Professor Antony Davies, Duquesne University, explains why higher tax rates won’t help to balance the budget in this short video.

Here are the points that Professor Antony Davies makes.

The federal government has increased the amount of tax revenue it has collected over the last fifty years. That is because our economy and population has grown over that time period, as has inflation.

A more useful way to analyze tax revenue is to track tax revenue as a percentage of GDP. Each year the government takes a slice of the economy for itself. How big is that slice? That is what percentage of GDP shows. Over the past fifty years, the government’s slice of the pie (percentage of GDP) has been about 18%.

During periods of budget deficits, some politicians call for raising tax rates. Is this effective? In the 1950s the top income tax rate was 90%. It fell to 50% in the 1960s to the 1980s. During this period the government’s slice of the pie (percentage of GDP) was 17%. In 1987 the top tax rate was lowered to 39%, then later to 28%, then back up to 40%, then down to 35%, where it is today. During this period the government’s slice of the pie (percentage of GDP) was around 18%.

The conclusion? It doesn’t matter whether the tax rates on the rich are high or low. The government’s slice of the economic pie stays about the same. The same applies to average income tax rates (not just top rates), capital gains tax rates, and corporate tax rates.

What is the lesson? If we really want to balance the budget, we need to grow the economic pie, not determine how to take a bigger slice. The bigger the economic pie grows, the more tax revenue the government gets. 18% of a large pie is more revenue than 18% of a small pie.

How do we generate a bigger economic pie?

• Lower tax rates
• Simply the tax code

10 Golden Rules of Effective Taxation

Arthur B. Laffer, Stephen Moore, and Jonathan Williams in the latest publication of Rich States Poor States₁ by the American Legislative Exchange Council (Alec.org) provide the 10 Golden Rules of Effective Taxation:

1. When you tax something more you get less of it, and when you tax something less you get more of it.
2. Individuals work and produce goods and services to earn money for present or future consumption.
3. Taxes create a wedge between the cost of working and the rewards from working.
4. An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.
5. If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.
6. The more mobile the factors being taxed, the larger the response to a change in tax rates. The less mobile the factor, the smaller the change in the tax base for a given change in tax rates.
7. Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.
8. An economically efficient tax system has a sensible, broad base and a low rate.
9. Income transfer (welfare) payments also create a de facto tax on work and, thus, have a high impact on the vitality of a state’s economy.
10. If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.

Note #1 and #10. If you tax something you get less of it, and if location A has lower tax rates than Location B, manufacturers will move to Location A. The conclusion? If we raise tax rates, we will have fewer jobs.

To Read More

Arthur B. Laffer, Stephen Moore, and Jonathan Williams, Rich States Poor States; (American Legislative Exchange Council, 2012) Available at: http:// http://www.alec.org/docs/RSPS_5th_Edition.pdf (May 4, 2012)

References

1. Rich States Poor States; (American Legislative Exchange Council, 2012) Available at: http:// http://www.alec.org/docs/RSPS_5th_Edition.pdf(May 4, 2012), ix-xii

Should We Soak the Rich?

The Goose That Laid the Golden Eggs is one of the most famous of Aesop’s fables. The cottager and his wife kill the goose to get the great lump of gold they think is inside. However, they find it is no different than any other goose. Their greed deprived them of a future steady income. So it is with the notion that we must tax the rich to pay for our out-of-control spending.

Raising tax rates on the rich will kill the golden goose. Increasing tax rates will discourage investment, cause total tax revenues to fall, and will increase, not decrease, the deficit. Here are three reasons why:

• More progressive tax rates are not fair
• We end up taxing people who are not really rich
• History has proven that increasing tax rates causes revenues to fall

More progressive tax rates are not fair

According to the Patriot Update₁ , “The top 1% of Americans pay 40% of all federal income taxes, and the top 10% pays as much as 70% in total. Conversely, the bottom 40% pays close to nothing.” How are the rich not paying their “fair share”? Why should we tax them more? Answer: because we can. They only have 1% of the votes.

The United States already soaks the rich, more so than any other developed country. As the following Newsmax magazine chart₂ shows , the tax burden of our 1% is higher than every other developed nation. The 1% in the United States supply 45.1% of all taxes, whereas in socialistic Sweden, the 1% only supply 26.7% How are the rich in our country not paying their fair share?

As the Newsmax article explains, the rich should not be targeted for higher taxes. It’s not just the rich who are getting richer in the U.S. The poor are getting richer too. Plus, the rich aren’t all born rich, and don’t all stay rich. Of the 400 richest people listed in the 2007 issue of Forbes magazine, only 32 were included when the list began in 1982. “Only 18% inherited their whole fortune, while about 70%—people like Amazon founder Jeff Bezos and Dell computer founder Michael Dell—amassed fortunes by giving the rest of us products we want.” ₃

We end up taxing people who are not really rich

The Democrats propose raising taxes on families making $250,000 a year and up. As Thomas Sowell points out:

Rich means having a lot of wealth. But income taxes don’t touch wealth. No wonder some billionaires are saying it’s OK to raise income taxes. They would still be billionaires if taxes took 100% of their current income.

What those who are arguing against “tax cuts for the rich” are promoting is raising the tax rates on families making $250,000 a year and up. A husband and wife making $125,000 a year each are not rich. If they have a kid going to one of the many colleges charging $30,000 a year (in after-tax money) for tuition alone, they are not likely to feel anywhere close to being rich. ₄

History has proven that increasing tax rates causes revenues to fall

As Thomas Sowell points out, in 1921 the tax rate on people in the top income bracket was 73%! Here was the consequence of those high tax rates, “The number of people with taxable incomes of $300,000 a year and up—equivalent to far more than a million dollars in today’s money—declined from more than a thousand people in 1916 to less than three hundred in 1921.” ₅ What happened? Did all those rich people go broke? The answer was of course not. They merely took the money they had invested in the economy (in businesses creating jobs) and invested it in tax-exempt securities, such as municipal bonds (in government creating red tape).

As the late Chuck Colson explains, the government’s role is not to reduce income inequality through progessive tax rates. “At the most basic level, government’s job is to preserve order, do justice, and restrain evil.”₆  Equality in the U.S. means legal and political equality. Each person has one vote and the rules are the same for everybody, no matter how much they make. The incentive behind taxing the rich is really no more than class envy.

References

1. Nathaniel Davidson, Taxing the “rich”? No, ruining America! (Patriot Update, December 7, 2010) Available at: http://patriotupdate.com/oldsite/exclusives/read/288/Taxing-the-rich?-No-ruining-America(May 1, 2012)
2. Stephen Moore, The Lie Behind Obama’s Class Warfare (Newmax, May, 2012), 56.
3. Ibid, 57.
4. As cited in Nathaniel Davidson, Taxing the “Rich” – Part 2 (Patriot Update, December 21, 2010) Available at: http://patriotupdate.com/articles/taxing-the-rich-part-2(May 1, 2012)
5. Thomas Sowell, Back to the Future: Part III (Townhall, September 15, 2011) Available at: http://townhall.com/columnists/thomassowell/2011/09/15/back_to_the_future_part_iii/page/full/(May 1, 2012)
6. Chuck Colson, Equality and Envy: The Proper Role of Government (BreakPoint, November 15, 2011) Available at: http://www.breakpoint.org/bpcommentaries/entry/13/18229(May 1, 2012)

Our tax system is a monstrosity that began as a 4-page form for individuals to complete in 1913 and has grown to 176 pages, if you count today’s 1040 with instructions. For corporations, it’s even worse. The National Taxpayers Union reports that General Electric in 2006 set a record by filing a 24,000 page tax return! We waste 7.64 billion hours costing $227 billion trying to comply with the byzantine rules formulated over the years in response to special interest groups₍₁₎

The flat tax saves money because it is simple

A flat tax would save time and money that could be spent on growing businesses and creating jobs. Here are the best reasons Tea Party Christians should favor a flat tax.

The current tax code contains 3.8 million words and takes a total of 7.6 billion hours and $227 billion to process/prepare tax returns₍₂₎. Now consider the flat-tax 10-line postage-card tax return above, where you basically enter your wages, subtract a couple of allowances, multiply the amount times 17%, subtract your withholding tax, and that’s it. Ten minutes tops.

Compare 10 minutes with the 24 hours it takes to process a typical 77-line 1040 form, not counting schedules. With the present 1040, to merely determine your income you must consider, wages, salaries, tips, taxable interest, tax-exempt interest, ordinary dividends, qualified dividends, taxable refunds, credits, or offsets of state and local income taxes, alimony received, business income or less, capital gain or loss, other gains or losses, IRA distributions, pensions and annuities, rental real estate, royalties, partnerships, S corporations, trusts, farm income or loss, unemployment compensation, social security benefits, other income. This is a joke!

According to the National Taxpayers Union, “The United States now ranks an embarrassing 124th out of 183 countries worldwide in total tax rate. Additionally, the U.S. ranked 66th worldwide for time spent complying with corporate tax filings, according to ‘Paying Taxes 2011,’ a study jointly published by the accounting firm PricewaterhouseCoopers and the World Bank Group” ₍₃₎. We need to make the U.S. business friendly, attracting entrepreneurs from around the world not making it more burdensome.

The National Taxpayers Union states, “The Tax code is so convoluted that no one inside or outside the IRS understands it.” ₍₄₎ They cite the 2007 USA Today story that asked five tax professionals to calculate a family’s tax bill and received five different answers. The National Taxpayers Union adds, “The IRS reported that taxpayers made an astounding 10.6 million math errors last year, up from 1.3 million the previous year” ₍₅₎

It need not be so. A flat tax would be simple, accurate, and efficient. We could collect the same total revenues, save time and money in the process, attract business entreprenuers and create jobs.

To Read More

David Keating, A Taxing Trend: The Rise in Complexity, Forms, and Paperwork Burdens (National Taxpayers Union, April 18, 2011) Available at: http://www.ntu.org/news-and-issues/taxes/tax-reform/complexity.html (April 15, 2012)

References

1. David Keating, A Taxing Trend: The Rise in Complexity, Forms, and Paperwork Burdens (National Taxpayers Union, April 18, 2011) Available at: http://www.ntu.org/news-and-issues/taxes/tax-reform/complexity.html (April 15, 2012)
2. Ibid, 1-2.
3. Ibid, 5.
4. Ibid, 14.
5. Ibid, 2.