• Tag Archives taxes
  • Why the Rich Actually Love High Taxes

     

    So we always hear that the rich should pay taxes more, that our tax rates aren’t high enough. If only we raise taxes we can solve a lot of our problems – inequality would go down and maybe we’d even have more economic growth. Now the funny thing about this view is it really doesn’t comport with our historical experience at all. Whenever we have raised taxes on the rich, we have seen horrible offenses against inequality and economic growth.

    The most illustrative of these eras was the 1950s, when the top tax rate, the top income tax rate in the United States, went all the way up to 91%. Now I want to point out that that is no misprint. The top tax rate in the United States was 100% minus 9%, 91%. If you made $200,000 or more, your last income was subject to 91% confiscation by the United States government.

    There were also 26 brackets in the income tax code, and they ran from 20% all the way up to 90%. If you made any kind of money at all, you were paying 30%, 40%, 50%. If you started making more money, 60%, 70%, 80%, 90%. That was a high tax era.

    Now you may be thinking, “But wait a minute. The 1950s, they were the greatest economic era ever. That’s when everybody had a job. Those jobs were for life. People got to live in suburbia and go on vacation and do all sorts of amazing things. It was post-war prosperity, right?”

    Actually, all of these things are myths. In the 1950s, the United States suffered four recessions. There was one in 1949, 1953, 1957, 1960, four recessions in 11 years. The rate of structural unemployment kept going up, all the way up to 8% in the severe recession of 1957-58.

    So there wasn’t significant economic growth in the 1950s. It only averaged 2.5% during the presidency of Dwight D. Eisenhower, and the tax code spawned inequality that is even unheard of today. How so? Well, when you have a marginal rate of the income tax that is 91%, to have an exception from that income tax is very valuable. If you were able to get a statute written into the tax code that says you don’t have to pay that 91% and you’re high-income, you could either pay nothing, or pay a much lower rate. That exemption is very valuable.

    The tax code in the 1950s was 11,000 pages. The first two pages of the tax code said very simple things. The opening line of the tax code said that income is taxable from any and all sources derived. Okay, if you make income, it’s taxable. And then the second two pages of the tax code with a list of the rates, the rates that started at 20% on low income and went all the way up to 91% on high income.

    The next 11,000 pages after those first two pages were exceptions to those statements. They were pet statutes that were written into law by Congress at the behest of lobbyists that said, “This income is not subject to taxation.” And always, in almost every case, it had to do with the income of the rich. Let’s give some examples.

    One of the most notorious cases, perfectly legal, by the way, was that of the movie studio mogul Louis B. Mayer. In 1951, Louis B. Mayer retired from his studio in Hollywood, and he got a lump sum payment from the studio of $2.7 million, which is, you know, probably about $20 million dollars today, and that income was not subject to the 91% tax rate. It was only subject to a 25% tax rate. How did that happen?

    Louis B. Mayer hired a lobbyist who got a Congressman to write a pet statute into the law that exempted his income from taxation and it applied only to Mayer and his associate who got those lump sum payments. That’s what the 11,000 pages in the tax code were. They were a nest of cronyism.

    And the only way that those exemptions would ever be thought to be put in the tax code is if the marginal tax rate were high. The marginal tax rate was high, therefore all sorts of people wanted exemptions from it. There was a famous comment among the legal bar in the 1950s. It was recorded by John F. Kennedy’s SEC chairman, William Carey. And that comment was, “Once you become a millionaire, you don’t try to litigate a tax case. You don’t try to contest the IRS if you say … they think you owe more money than you do. You simply get the statute changed.” That’s how easy it was in the 1950s to get Congress to write the pet exemption for you in the tax code.

    So you can see what kind of pernicious effects that had on the inequality situation in the United States in the 1950s. The rich had all the money and they hid it from the tax man. Meanwhile, in doing so, they weren’t deploying their capital in ways that were productive for jobs and economic growth. They were hiding it in all these little ways that Congress permitted them to hide it. I mean, the Treasury estimate in the middle of this in 1957 said that only 43% of income in the United States is really subject to taxation. The other 57% is hidden in mortgage interest and all the other 11,000 pages of exemptions.

    Unions ended up calling the tax code the “Swindle Sheet,” because that’s where the rich were able to hide their income, and they weren’t making it available for productive growth. So when we talk about the era of high taxes, that it was associated with economic growth and jobs for everyone, that actually is not accurate at all. It was an era in which the rich deployed their income in ways that the government told them to so that they could keep it, and the net result was A, inequality, and B, slow economic growth. There’s a reason we dumped all that for tax rate cuts in the 1960s.

    Reprinted from Learn Liberty.


    Brian Domitrovic

    Brian Domitrovic is assistant professor of history at Sam Houston State University in Huntsville, Texas, and author of Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.

    This article was originally published on FEE.org. Read the original article.


  • How Middle-Class Europeans Fare Under the Welfare State

    According to progressives like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.

    They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).

    But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.

    The US Has the Most “Progressive” Tax System

    Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.

    And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.

    Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.

    Here’s a chart the WSJ included with the editorial.

    As you can see, high payroll taxes and the value-added tax are a very costly combination.

    And the rest of Europe is similar to Germany.

    …Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.

    Percent of Economic Output

    Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.

    Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).

    The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.

    According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).

    But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.

    Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.

    Sternberg makes the same point in his column.

    Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.

    Exactly.

    There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.

    And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.

    P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.

    P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.

    Reprinted from International Liberty.


    Daniel J. Mitchell

    Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.


  • You Can’t End Poverty without Cutting Taxes

    You Can’t End Poverty without Cutting Taxes

    Recent tax proposals have let loose the dogs of economic war. While debate has raged over the impact of tax cuts on growth and revenue, the moral case for low taxation remains largely neglected.

    Critics have predictably launched an all-out assault on the idea that taxpayers should keep more of their own money. One op-ed bemoans the “alchemistic belief that huge tax cuts can pay for themselves by unleashing faster economic growth.” Another decries the alleged lack of financing to “pay” for tax cuts, while further deriding them as mere “benefits for the wealthy.” Others have abandoned evidence entirely and resorted to personal attack. “When power meets greed, you can bet, the schmucks in the red hats will pay,” snarks one such commentator.

    Tax reform advocates have rightly refuted these tired and often evidence-free attacks. For instance, hard facts demolish the farce that tax cuts uniquely benefit the rich. In percentage terms, tax reductions have historically tilted toward lower earners. As Thomas Sowell has pointed out, the slogan “tax cuts for the rich” should be labeled “tax lies for the gullible.” Furthermore, talk of tax cuts “paying for themselves” is disingenuous.

    A lower tax rate may mean lower revenue, but less revenue is not the equivalent of government expenditure. Government spending must be “paid for,” but taking less of a worker’s income “costs” nothing, as the income earner—not Uncle Sam—has the right to the fruit of his labor. To argue otherwise means income first belongs to the state, not the individual. Remarkable that a country whose founding creed was “no taxation without representation” would lose sight of such an elementary truth.

    Moreover, whether lower taxes translate to higher revenue depends on the tax cut in question, but what is clear is that heaps of evidence—including a study by former Obama administration economist Christina Romer—show that lower taxes boost economic growth.

    The Case for Lower Taxes

    Important as these matters are, however, the case for reduced taxation is also compelled by moral considerations.

    Every generation of Americans has understood that taxation is a fact of life. Ben Franklin famously remarked that in life “nothing can be said to be certain, except death and taxes.” However, our founders worked to keep taxes limited and uniform. “[A]ll duties, imposts and excises shall be uniform throughout the United States,” reads the U.S. Constitution. [emphasis added] That is why they not only rejected progressive income taxation, but income taxation entirely. The early republic instead applied taxes primarily to goods, which provided maximum personal choice (to avoid the tax one could avoid purchasing the product).

    This vision generally held until the early 20th century, although there were two brief experiments with an income tax prior to that period. The first involved income taxation as high as ten percent during the civil war, which was repealed shortly thereafter.

    The second was in 1894 when Congress passed an income tax that applied to the top two percent of wealth holders. However, it was quickly struck down by the Supreme Court as unconstitutional. As historian Burt Folsom notes, “At age 77, [Stephen] Field,” who was a Supreme Court justice at the time, “not only repudiated Congress’s actions, he also penned a prophecy. A small progressive tax, he predicted, ‘will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich.’”

    That prophecy became reality in 1913, when a constitutional amendment cleared the way for progressive income taxation. Beginning at a modest 7 percent, the top rate didn’t remain there for long. It quickly rose to 24 percent, before jumping to 63 percent under Herbert Hoover. It reached 90 percent under FDR, who proposed raising it to a breathtaking 99.5 percent in 1941. Thankfully, his proposal was rejected and the top rate declined in subsequent decades. Today it stands at 39.6 percent.

    But there are at least three moral reasons for lower taxation.

    The Morality of Tax Cuts

    First, bigger government means less individual generosity. The more of our money government consumes, the less we give to private charities and local community members in need. Jonathan Gruber, an economist from MIT, conducted a study of the New Deal government in the 1930s, and concluded that private charity spending “fell by 30% in response to the New Deal, and that government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939.” Another study of charitable giving from 1965 to 2005 “showed that increases in state and local government welfare and education spending do reduce charitable giving.”

    Second, benevolence with other people’s money is no virtue. Advocating higher taxes on others to pay for government programs may make us feel good, but virtue requires self-sacrifice and personal generosity. Relying on the state gives us the luxury of feeling good about ourselves without having to do good.

    Third, government aid is often less effective at lifting the destitute. Private charities make distinctions between people who truly need help and those who do not, as well as between those who need material assistance and those who need moral refocus, personal counseling, relationship repair or spiritual commitment. Government, no matter how well-intentioned, does not and cannot make such distinctions.

    The State Perpetuates Poverty

    In his ground-breaking book, Losing Ground, Charles Murray documents poverty steadily declining through the 1940s, 50s and 60s, before government’s “War on Poverty.” Afterward, however, the trend reversed. According to government’s own figures, the poverty rate has failed to drop after 50 years and $22 trillion in anti-poverty spending.

    As social scientist Marvin Olasky notes, the failure is attributable to government’s emphasis on “entitlement rather than need.” As the state swelled, even “small efforts at categorization and discernment were seen as plots to blame the poor rather than the socioeconomic system that trapped them,” Olasky notes. “‘Freedom’ came to mean governmental support rather than the opportunity to work and move up the employment ladder.”

    Our founders would be unsurprised. Reflecting on poverty, Ben Franklin remarked:

    “I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

    There is no compassion in keeping the downtrodden impoverished, nor is it good for the economy. These realizations led Milton Friedman to proudly proclaim: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” Reasons abound and the possibility exists. We simply need to make the case.  


    David Weinberger

    David Weinberger formerly worked for The Heritage Foundation. He currently blogs at diversityofideas.blogspot.com.

    This article was originally published on FEE.org. Read the original article.