President Obama and Democrats in Congress are trying to use the deficits created by their spending spree as an excuse to raise taxes. All we have to do is tax the millionaires and billionaires, they say, and our deficits will disappear.
But it’s an historical fact that higher tax rates don’t raise revenues.
When pressed, Obama admits the real goal is not revenue at all. He’s for tax hikes even if they hurt the economy and make the deficit worse. It’s a reckless approach that puts punishing success ahead of growing the economy and creating jobs.
Over the years, the top federal income tax rate has been all over the map. When the income tax started in 1913, the top rate was 7 percent. By the peak of World War II, it reached an all time high of 94 percent. It stayed at 91 or 92 percent throughout the 1950s until President John F. Kennedy’s historic 1963 tax cut took the top rate to 70 percent.
Reagan cut it to 50 percent and then to 28 percent.
Tax hikes under George H. W. Bush and Clinton took the top rate back up to 39.6 percent and the Bush tax cuts brought it down to 35 percent.
So in 40 years we’ve seen rates ranging from 91 percent to 28 percent.
You might reasonably guess that the federal government collected a lot more money as a percent of Gross Domestic Product (GDP) with a 92 percent tax than with a 28 percent tax. But you’d be wrong.
Total federal revenues only exceeded 20 percent of GDP once in the past 40 years. It was in 2000, driven by the dot com boom, in a year when the top rate was 39.6 percent.
Back when the top rate was over 90 percent, from 1950 to 1963, total federal revenues averaged just 17.4 percent of GDP.
There have been ups and downs, but in an very narrow range that hovers just below 19 percent of the economy – whether the tax rate on “the rich” is 28 percent, 92 percent, or something in between.(It should be noted that this means the only way to balance the budget is to bring spending – which has been above 24 percent of GDP every year under Obama – back down to normal levels.)
The fact that federal revenues don’t seem to increase with tax hikes or decrease with tax cuts has been named "Hauser’s Law" after Stanford University economist W. Kurt Hauser. As Hauser explained:
“Why? Higher taxes discourage the ‘animal spirits’ of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.”
So if the federal government can expect to get around 19 percent of GDP no matter what the top tax rate is, a politician who is sincerely concerned with maximizing federal revenue should be inclined to lower tax rates, make the economy bigger, create more jobs, and therefore give the government a 19-percent slice of a bigger pie.
Obama is concerned with something else. Four years ago, ABC News anchor Charlie Gibson asked Obama if he would raise capital gains taxes even if he knew it would result in lower revenues. Obama replied yes, he would raise taxes anyway “for purposes of fairness.”
Senate Majority Leader Harry Reid explained this week that the problem is “millionaires and billionaires aren't sharing the pain.” It reminds me of the quote attributed to Winston Churchill that the chief virtue of socialism is that the misery is spread equally.
Fairness, to Obama and Reid, means punishing success. It means ugly class warfare, dividing the American people, and making sure that “millionaires and billionaires” feel pain, even if that means a smaller economy, fewer jobs, and more trillion-dollar deficits.