On Tax Policies, Part 1


by Don Fredrick, ©2017, author of The Complete Obama Timeline

(Nov. 9, 2017) — With tax cut legislation in the works, several leftists have regurgitated a 2014 Huffington Post article by Ben Walsh—who argues for a 90 percent tax rate for the highest-paid Americans. It is one of the dumbest articles ever written (and I’ve read quite a few at HuffPo and Vox.com).

Walsh first (correctly) notes, “Currently, the top rate of 39.6 percent is paid on income above $406,750 for individuals and $457,600 for couples.” He wants that rate to be 90 percent. An individual who earns, let’s say, $500,000 per year is obviously better off than the average American, but $500,000 hardly places one in the “filthy rich” category. Nevertheless, Walsh thinks a 90 percent tax rate would be perfectly appropriate for such an individual. ($10 says Walsh earns far less than $406,750 per year.)

Walsh complains about the “decades of a more or less strict adherence to the gospel that tax cuts for the highest income earners are good.” Walsh is mistaken. The gospel is that tax cuts for all income earners are good. No one—wealthy or not—should pay any more than is necessary to fund the essential functions of government. Taxes are high because the government spends too much. It spends too much because it is involved in far more than the essential functions outlined in the U.S. Constitution. It is involved in far more because the politicians promise benefits and services in exchange for votes—and shamelessly ignore the U.S. Constitution.

Walsh forgives John F. Kennedy for his 1960s tax cuts, because he (was a Democrat and) only “cut rates to around 70 percent.” But “The huge drops—from 70 percent to 50 percent to less than 30 percent—came with the Reagan presidency” in the 1980s. God forbid that the government should consider allowing anyone to keep 70 percent of what he earned! Walsh believes that being a slave to the government for 30 percent of the year is insufficient. He needs more cotton picked, and working in the fields only three days out of 10 is unacceptable. To Walsh, nine days out of 10 makes more sense. (Even God rested on the seventh day.)

Walsh called Kennedy’s tax cuts “hardly radical. He lowered rates when the American economy was humming along, no longer paying for World War II and, relative to today, an egalitarian dreamland.”

Walsh is again mistaken. The economy was sluggish. In fact, the nation suffered a recession from April 1960 through February 1961, during which the Gross Domestic Product fell 1.6 percent. Asked why he supported tax cuts, Kennedy told a reporter, “To stimulate the economy. Don’t you remember your Economics 101?” (Why, Mr. Walsh, does one need to stimulate an economy that is “humming along”?)

Further, the nation was still paying for World War II, which left the nation’s national debt in excess of $250 billion. The debt was more than $286 billion at the end of 1960, and more than $300 billion when Kennedy was assassinated. Since then, the national debt has skyrocketed. For many years now, the government has only been paying interest on the national debt; it has not paid down the principal—and it possibly never will.

There will probably be no “official,” dramatic, instant default on the national debt. There will simply be a “gradual default” through the use of devalued dollars. When government bonds, stock, and notes are cashed in, the creditors are paid with money that is worth only a fraction of what it was when the loan originated—because of the Federal Reserve’s expansion of the money supply. If you purchased a $100 savings bond years ago, is not the government partially defaulting on that loan when it eventually pays you back with dollars that are worth only half the value they had when you bought the bond?

Consider this scenario: You loan your neighbor $100 to buy groceries. He promises to pay you back next year. Twelve months later you receive your $100 back, but in that year the nation has experienced price inflation of five percent. If you take that $100 to the supermarket, you will not be able to buy the same groceries for the same price your neighbor paid. You will only be able to buy 95 percent of the products he bought last year—but it will still cost you $100 because of inflation. Did your neighbor honor his loan commitment, or did he cheat you out of $5.00? Although he paid back the $100 he borrowed, that $100 is by then worth only $95. That is how the federal government will gradually default on its $20 trillion debt. That is why the government tolerates—and even encourages—inflation of the money supply.

Getting back to Walsh, as far as the 1960s being an “egalitarian dreamland” relative to today, he is apparently unaware of the struggle for civil rights six decades ago. Does he think African-Americans were treated better in the 1960s than they are now? Does he not know that more women than men now attend college? Is he not aware that the CEO of General Motors is a woman? By “egalitarian dreamland” Walsh may mean that the “income gap” was smaller in the 1960s, when there were no multibillionaires like Bill Gates and Mark Zuckerberg. But taxing the heck out of Gates and Zuckerberg would do nothing but punish Gates and Zuckerberg. It would not make poor people any less poor, and it would not magically turn janitors into corporate CEOs. If Walsh wants income equality, that is easy to achieve: Impose Venezuelan-like socialism and almost every American will be equally poor (except for the elites running the regime, of course).

Walsh and other leftists make the argument that because the economy was going gangbusters when there was a 90 percent tax rate, we should now restore that 90 percent rate, sit back, and watch the jobs appear and the poor dine in five-star restaurants. But the economy was not going gangbusters under the 90 percent rate. As noted, there was a 1960-1961 recession, as well as a 1953-1954 recession. If the high taxes of that era were so wonderful and great for the economy, why did those taxes not prevent those recessions?

At the same time Walsh and others pine for a return to a 90 percent tax rate, they also argue that almost no one paid that rate anyway because of tax loopholes. Walsh: “A very high marginal tax rate isn’t effective if it’s riddled with loopholes, of course.” We are to believe the claim that a 90 percent tax rate was responsible for a great economy (even though it was not so great an economy), and also believe that most wealthy people escaped that high rate. How can rates that almost no one paid have created an economic boom?

The economy is of course influenced by thousands of factors. It is ridiculous to claim that high tax rates can be good for any economy. (To argue that high taxes in the 1950s caused prosperity is like arguing gravity helps Olympic high-jumpers.) The U.S. economy grows despite high taxes and government interference, not because of them. Fortunately, the combination of capitalism and individual liberty is so powerful that it can withstand almost any assault. But that does not justify intensifying the assault.

Additionally, the leftists (who rarely complain about deficits when they are in power) argue that we cannot afford tax cuts because the government needs that revenue to pay its bills. Granted, the government spends more than it takes in each year and keeps borrowing money to cover its massive deficits. But it is not true that tax cuts cause a loss of tax revenue. In fact, the opposite is true. After the Kennedy, Reagan, and Bush income tax cuts, federal tax revenue increased. (Yes, tax revenue increased.) Since 1950, federal tax revenue has declined from year-to-year only a handful of times, and those declines were due to recessions or other factors, not tax cuts. (For example, federal tax revenue declined because of reduced economic output after the terrorist attacks of September 11, 2001.)

Tax cuts result in increased tax revenue because they encourage businesses and individuals to spend more, invest more, be more productive, and hire more workers. More people working and paying taxes means fewer people on welfare not paying taxes. A lower tax rate imposed on a larger population of workers generates more tax revenue than a higher tax rate imposed on fewer workers. (Ten percent of a bucket of water is greater than 20 percent of a cup of water.) But, if tax cuts result in increased tax revenue, why does the national debt keep growing? The debt continues to grow not because tax revenue goes down (it does not), but because Congress (Democrat and Republican members alike are at fault) spends the increased revenue generated by the tax cuts—and then spends even more.

Let’s address the 1990s, a period in which Democrats also claim higher income taxes generated a good economy. Again, those income taxes did not cause an expanding economy. The growing economy of the late 1990s was partly the result of a cut in the capital gains tax (from 28 to 20 percent) and welfare reform—which Bill Clinton opposed but which were eventually shoved down his throat by a Republican Congress. Economic growth was also encouraged by the introduction of Roth IRAs, a significant decline in the price of oil, and the increased use of computers and the expanding Internet. Small and large businesses alike took advantage of the new technology, and that increased productivity, boosted wages, and prompted additional hiring. High income taxes did not cause the improved economy of the late 1990s. Nor did Bill Clinton. (He just happened to be in the White House when it occurred.)

As with income taxes, the reduction of capital gains taxes also results in increased tax revenue. To many people that does not makes sense. How can cutting capital gains taxes yield greater tax revenue? The answer is that lower capital gains taxes encourage investors to sell their assets and reinvest their profits elsewhere, while increasing the capital gains tax encourages investors to sit on those assets and not sell them. When assets are not sold, there are no capital gains to tax. Ten percent of something generates tax revenue, while 20 percent of nothing yields zero tax revenue.

All of this is common sense, which many leftists seem to lack. They ridicule the famous “Laffer curve,” but Arthur Laffer is correct. Increasing a tax rate yields increased tax revenue—but only to a point. Zero tax produces no tax revenue; a five percent tax produces some tax revenue; a 10 percent tax produces more revenue. But a 100 percent tax would produce no tax revenue, because people would simply stop working (or deal in an off-the-books black market). A 90 percent tax would produce some limited tax revenue, but most people would still stop working. The goal of the money-hungry legislator is to find the “sweet spot”—the tax rate which produces the most tax revenue, while not prompting many people to stop investing, stop working, or flee to a black market.

The problem the legislators have is that the cumulative “sweet spot” is too low to fund a $4 trillion-per-year government. The politicians attempt to solve that problem by finding the sweet spot of each income level. They tax lower-income workers at lower levels, and tax higher-income workers at higher levels. A person who earns $25,000 per year can hardly afford a $5,000 tax bill, but a person who earns $100,000 per year can at least still feed, shelter, and clothe his family after paying a $20,000 tax bill. But even with “progressive” income tax rates, the government still comes up short. So it taxes capital gains as well.

What makes the capital gains tax particularly egregious is that (like the income tax) it is not indexed for inflation. Assume you earned $50,000 last year and were able to invest $5,000 of that income in the stock market. If you hold your stocks for several years and then sell them for $8,000, the capital gains tax is applied to your $3,000 gain ($8,000 minus $5,000). But the IRS ignores inflation in the equation. Your $8,000 may only be worth $7,000 because of the inflation that occurred while you held your stocks. (That is, what used to cost $7,000 now costs $8,000, because the Federal Reserve keeps inflating the money supply, making your money worth less each year.) Your gain therefore is not really $3,000. It is actually only $2,000 ($7,000 minus $5,000). Nevertheless, the government taxes the inflated value of the gain. You are being taxed for $3,000 that has only $2,000 in purchasing power.

If the government increases the capital gains tax rate, you are even worse off. You may decide not to sell your stocks for $8,000. If you do not sell the stocks, your gain is zero. The tax is therefore also zero. If you can afford to do so, you will hold on to your stocks and not sell them until the next time Congress lowers the capital gains tax rate to a less unreasonable level. Again, this is common sense. People act in their own economic self-defense.

Even some Marxists understand this. During a 2008 Obama-Clinton primary debate, journalist Charles Gibson pointed out to Obama that increasing the capital gains tax would result in reduced tax revenue. Obama accepted that argument, yet told Gibson he still endorsed a tax increase for purposes of “fairness.” In other words, even though increasing the tax would lower federal tax revenue, Obama wanted to hike the rate anyway to “screw the wealthy.” (Obama apparently did not care that many non-wealthy Americans also own stocks and pay capital gains taxes.)

But what most causes leftists to advocate counterproductive tax policies is their belief that income belongs not to the person who earned it but to the government, and that the job of Congress is to distribute it “fairly.” To leftists, the economy is one large pie. If one person has a larger slice of pie, surely he must have come by that portion unfairly! They believe their job is to cut the economic pie into equal pieces so that everyone receives his “fair share.” It does not occur to them that the pie can and does grow. The pie grows larger when businesses and individuals are more productive. (The nation’s Gross Domestic Product goes up.) The pie shrinks when businesses and individuals are less productive. (The Gross Domestic Product falls; two such quarters in a row are classified as a recession.)

The leftists believe the pie belongs to and should be divided into slices by the government. As a result, they look at tax cuts as a “gift” from that government to the taxpayers. But a tax cut is not a gift from government; it is simply a reduction in the amount of confiscated wealth.

Please watch for Part 2 of Mr. Fredrick’s essay on Friday.

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