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Democrats have been having a field day with the cry of "tax cuts for the rich" -- for which Republicans seem to have no reply. This is especially surprising, because Democrats made the same arguments back in the 1920s, and the Republicans then not only had a reply, but one that eventually carried the day, when the top tax rate was brought down from 73 percent to 24 percent.
What was the difference then?
The biggest difference is that Secretary of the Treasury Andrew Mellon took the trouble to articulate the case for lower tax rates, in articles that appeared in popular publications, using plain language that ordinary people could understand. Seldom do Republican leaders today even attempt to do any such thing.
In 1924, the ideas from these articles were collected in a book which Mellon titled "Taxation: The People's Business." That book has recently been reprinted by the University of Minnesota Law Library. Today's Republicans would do well to get a copy of Mellon's book, which shows how demagoguery about "tax cuts for the rich" can be exposed for the nonsense that it is.
People in the media could also benefit by seeing how the "tax cuts for the rich" demagoguery collapses like a house of cards when you subject it to logic and evidence.
Those who argue that "the rich" should pay a higher tax rate, and that the revenue this would bring in could be used to reduce the deficit, assume that higher tax rates equal higher tax revenues. But they do not.
Secretary Mellon pointed out that previously the government "received substantially the same revenue from high incomes with a 13 percent surtax as it received with a 65 percent surtax." Higher tax rates do not mean higher tax revenues.
High tax rates on high incomes, Mellon said, lead many of those who earn such incomes to withdraw their money "from productive business and invest it in tax-exempt securities" or otherwise find ways to avoid receiving income in taxable forms.
That is even easier to do today than in Andrew Mellon's time. The very same liberals who complain that Mitt Romney -- among thousands of others -- puts his money in the Cayman Islands nevertheless act as if raising the tax rates automatically raises tax revenues. It can instead drive money out of the country and drive jobs out of the country with it.
The United States has long been a place where foreigners from around the world have sent their money to be invested, more than offsetting the money that Americans invested abroad. But, in recent years, the net flow of investment is out of America to places overseas that don't tax as much.
Mellon cited statistics that showed the opposite of what the high-tax advocates claimed. Although incomes in general were rising from 1916 to 1921, the taxable income of people earning $300,000 and up dropped by about four-fifths.
That didn't mean that "the rich" were becoming poor. It meant that they had arranged to receive their incomes in forms that were not taxable. Mellon asked where the money of these high income earners went. He answered: "There is no doubt of the fact that much of it went into tax-exempt securities." In today's global economy, much of it can also easily be sent overseas -- much more easily than workers can go overseas to get the jobs this money creates in other countries.
After Mellon finally succeeded in getting Congress to lower the top tax rate from 73 percent to 24 percent, the government actually received more tax revenues at the lower rate than it had at the higher rate. Moreover, it received a higher proportion of all income taxes from the top income earners than before.
Something similar happened in later years, after tax rates were cut under Presidents Kennedy, Reagan and G.W. Bush. The record is clear. Barack Obama admitted during the 2008 election campaign that he understood that raising tax rates does not necessarily mean raising tax revenues.
Why then is he pushing so hard for higher tax rates on "the rich" this election year? Because class warfare politics can increase votes for his reelection, even if it raises no more tax revenues for the government.
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Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.
COPYRIGHT 2012 CREATORS.COM
May 23, 2012 @ 9:38 am
Higher tax rates do not mean higher tax revenues. It just means that honest people of means are forced to become as dishonest as they people who seek to oppress them by avoiding having to pay the oppressive taxes. Just more productive time wasted that should have been spent creating wealth for America.
It should be more about taxing high crimes and misdemeanors, than high incomes by liberal misdirected meanies
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May 23, 2012 @ 1:50 pm
As a professional tax preparer, I regularly advise customers on the matters of both tax avoidance and evasion when the rules unfairly penalize them for productivity. Much less — if any — of that would be necessary with a fair flat tax.
Someone please explain to me the rationale behind a higher tax rate for those earning more. It sounds like a punitive measure, not a ‘fairness’ issue.
Let’s not forget that when Amendment XVI was enacted, politicians were scared of a Bolshevik uprising in this country and populist movements about ‘sharing the wealth’ were rampant.
May 23, 2012 @ 3:20 pm
For those interested, this book is available, legally, free as an ebook. I just downloaded it via the Nook store, but I’m sure most other sources (Kindle store, iBooks, etc) would have it as well.
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May 24, 2012 @ 12:05 pm
Whenever the liberals start talking about taxing the rich I remember this. So I am reprinting it, not that the people here don’t already know this but maybe they can share it with their liberal friends!
This is long but worth it
Bar Stool Economics 101
Suppose that every day, 10 men go out for beer, and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first 4 men(the poorest) would pay nothing.
The fifth would pay $1
The sixth would pay $3
The seventh would pay $7
The eighth would pay $12
The ninth would pay $18
The tenth man(the richest) would pay $59
So, that is what they agreed to do.
The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers”, he said, “I’m going to reduce the cost of your daily beer $20”. The drinks for the 10 men now cost just $80.
The group still wanted to pay their bill the way we pay our taxes; so the first four men were unaffected. They would still drink for free.
But what about the other 6 men – the paying customers? How would they divide the $20 windfall so that everyone would get his ‘fair share?’
They realized that $20 divided by 6 is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay by the following:
The fifth man, like the first four, now paid nothing(a 100% savings)
The sixth now paid $2 instead of $3 (33% savings)
The seventh now pay $5 instead of $7(28% savings)
The eighth now paid $9 instead of $12(25% savings)
The ninth now paid $14 instead of $18(22% savings)
The tenth now paid $49 instead of $59(16% savings)
Each of the six was better of than before. And the first four continued to drink for free. But once outside the bar, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10”.
“Yeah, that’s right,”, exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got 10 times more than I!”
“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth man and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore(See state of California). In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David Kamerschen Ph.D. Professor of Economics University of Georgia
For those who understand, no explanation needed. For those who do not understand, no explanation is ever possible