In 2001 and 2003, President Bush and the Republican Congress cut taxes for everyone. Like the Reagan tax cuts and the Kennedy tax cuts before them, the Bush tax cuts are historical events that help define today’s tax reality.
Changing that reality by raising current tax rates is not a tax cut by any definition of the term; it is a tax increase. That is why today’s tax debate about “the Bush tax cuts” is yesterday’s mashed potatoes, unless that is, some delusional politician is willing to argue with a straight face that we need to raise taxes to revive economic growth, in which case he too will soon become yesterday’s mashed potatoes.
The current federal income tax system is a heavy burden on work, saving, investment and entrepreneurial risk taking, and therefore it is a positive hindrance to reviving the U.S. economy and creating new jobs. It should be scrapped.
A new federal tax system should be adopted based upon careful consideration of these fundamental questions: What should the federal government tax and at what rate should it be taxed; what is the least economically harmful way to tax American citizens; and what are optimal tax rates to raise revenue without discouraging work, saving, investment and entrepreneurial risk taking?
Of course, any serious discussion of taxes cannot take place in isolation from a larger debate over public spending; the reason government levies taxes to begin with. How much of the nation’s income should government confiscate for public spending? What programs should be cut and what programs, if any, should be expanded?
These tax and spending questions should structure the 2012 presidential election but we can’t wait for that debate before we take practical interim steps to revive the economy, something President Obama’s old-style Keynesian spend, spend, spend policies have failed to do. That is why the new Congress at a minimum should reduce tax rates across the board by a third on “taxable income” as it is currently defined and pay for any lost revenues not made up by higher economic growth with across-the-board spending reductions as the new Conservative British government and some American states are doing.
As a general proposition, history informs us that once marginal tax rates rise above 30 percent, they become demonstrably counterproductive. John Maynard Keynes thought any tax rate over 25 percent was counterproductive. Adding additional layers of taxation on top -- as we do currently with the corporate income tax (soon to have the highest corporate tax rate in the world), taxes on dividends and capital gains makes a bad situation economically intolerable. People work, save and invest less, and they take fewer entrepreneurial risks.
The economy suffers, and fewer jobs are created. The “rich” actually end up paying less of the overall tax burden as they resist excessively high tax rates by sheltering, diverting, hiding and under-reporting income.
When tax rates are lowered, the share of taxes paid by upper-income individuals and businesses rises as they bring their money back into productive activity, which benefits everyone.
In the 1920s, the top tax rate was brought down from 73 percent to 25 percent, and the share of taxes paid by the wealthy rose from 44.2 percent in 1921 to more than 78 percent in 1928.
In the 1960s, after the Kennedy tax rate reductions cut the top marginal tax rate from 91 percent to 70 percent, the share of taxes paid by those earning more than $50,000 rose from 11.6 to 15.1 percent.
In the 1980s, after Reagan's across-the-board tax rate reductions and tax reform brought the top marginal rate down to 28 percent, the share of taxes paid by the top one percent grew from 17.6 percent in 1981 to 27.5 percent in 1988.
By contrast, today’s top rate remains 35 percent. It is time to cut tax rates across the board once again. As Jack Kemp used to say, “If you want to ‘soak the rich,’ cut their tax rates.”
And, as Jack Kennedy used to put it:
“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”
The new Congress should enact an immediate across-the-board tax rate reduction from today’s levels combined with an across-the-board cut in government spending and a reduction in the federal workforce, including contractors, along with a repeal of Obamacare, president Obama’s green subsidies and other unspent stimulus and TARP bailout funding before they sink their tentacles further into the U.S. Treasury.
Such action to revive economic growth would set the stage for a grand national debate in 2012 where serious long-term reforms could be put on the table, including entitlement reform, which would lower long-term spending and permanently eliminate deficits.
Getting the economy back on track now through across-the-board tax rate reductions and spending reductions would make possible long-term reforms, including personal accounts eventually expanded to finance all of the benefits now financed by the payroll tax, block granting Medicaid and all federal welfare programs back to the states, and transforming all of Medicare into a Medicare-Advantage-like program, where seniors could use their share of Medicare funding for private insurance of their choice.
Lawrence A. Hunter, Ph.D. is president of The Alliance for Retirement Prosperity Association. He is also president ofthe Social Security Institute, a 501(c)(4) non-profit organization, where he does economic research and writes reports on a diverse range of public policy issues
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