It’s the Spending, Stupid

It’s like banging my head up against a wall with these people. Truly- I cannot think of a better way to describe it.

Of course I’m referring to the fiscal cliff debate, and the Democrat push to let the Bush Tax cuts expire for the wealthy. . . or for EVERYONE if they don’t get their way. This situation, combined with pending taxes soon to come down the pike from Obamacare, constitute what many call “Taxmageddon.” The Heritage Foundation refers to it as a “unprecedented Tax Hike For 2013. Starting January 1, 2013, Americans will face a $494 billion tax increase, the highest ever in one year. Obamacare’s tax increase over 10 years barely edges ahead of Taxmageddon at $502 billion. The average American household would see its taxes rise by $3,800 in 2013 alone. And this is just for one year. Taxpayers would see even higher tax hikes in succeeding years.”

But I’ve digressed. I’d like to focus on the push to let the Bush Tax Cuts expire for the most affluent Americans.

How many different ways do I, or anyone else with a sane fiscal head on their shoulders, have to explain the fact that there simply isn’t enough money currently in the coffers of America’s wealthiest to cover the gargantuan debt and deficit? Let’s be real, there isn’t enough to cover even half! The situation is so massive that frankly, Merriam-Webster needs to decide upon a new word to more effectively convey the sheer scope of this predicament.

Regardless of your personal leanings/convictions; whether you’re a Keynesian or a Capitalist; a Socialist or a Communist- the MONEY SIMPLY ISN’T THERE to pay for our debt and deficit.

I heard a stat on the morning news that went something like this:

If the Bush tax cuts are allowed to expire, the resulting (expected) revenue from these higher rates would fund the government. . . .for approximately 8.5 days. EIGHT POINT FIVE DAYS. As in, one week and 1.5 days. As in, less than a month. As in, 1/52 of the year. I’ve said this before but I’ll say it again– Our government only takes in 6 billion dollars a day, yet spends 10 billion. That’s a little over 416 million an HOUR, yet the government only makes 250 million an hour. That would be like you spending $16 an hour when you only make 8, and then relying on a one week raise to get you out of your mess.

I’ve said this before and I’ll say again too: “If the IRS grabbed 100 percent of income over $1 million, the take would be just $616 billion. That’s only a third of this year’s deficit. Our national debt would continue to explode.”

John Stossel put it well: “It’s the spending, stupid!”

As David Limbaugh said earlier, why is it that when the Democrats discuss the impending fiscal cliff, it’s always in the context of a need for more revenue, rather than a need to turn off the spending spigot? The idea that enough revenue can be raised through the rich alone to fully deal with the cliff is not only laughable, it is absolutely false. If you, Joe Middle Class Taxpayer, think you’re not going to be hit with more taxes, you’ve got another thing coming. To deal with our deficit and debt through taxation without addressing spending in a MAJOR way, we’re looking at MASSIVE tax increases across the board, for rich and poor alike. . .and even though we won’t come close to dealing with our fiscal problems. After such increases, as history has shown us, productivity declines when taxes go up, generating even less revenue. Thus, the problem will only increase with higher taxes, even though the impetus behind them is higher revenue.  Decreases in tax rates, however, allow for businesses to expand, for employees to earn more, and for consumers to spend more. . . resulting in HIGHER revenue.

An American president once put it this way:

“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.”

Any guesses?

That was John F. Kennedy.

Please scroll down for a compilation by the Heritage Foundation of famous tax cuts in American history, and the budget impacts they had:

There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and “rich” taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden – a consequence that should lead class-warfare politicians to support lower tax rates.

Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to “soak the rich,” the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.

1) Lower tax rates do not mean less tax revenue.

The tax cuts of the 1920s

Tax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.

According to then-Treasury Secretary Andrew Mellon:

The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.

The Kennedy tax cuts

President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. Recognizing that high tax rates were hindering the economy, President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).

According to President John F. Kennedy:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

The Reagan tax cuts

Thanks to “bracket creep,” the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

According to then-U.S. Representative Jack Kemp (R-NY), one of the chief architects of the Reagan tax cuts:

At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.

2) The rich pay more when incentives to hide income are reduced.

The tax cuts of the 1920s

The share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.

The Kennedy tax cuts

Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.

The Reagan tax cuts

The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.

Harmful Spending & Complexity

Lower tax rates are important, but they are not the only critical issue. Both the level of government spending and where that money goes are very important. And even when looking only at tax policy, tax rates are just one piece of the puzzle. If certain types of income are subject to multiple layers of tax, as occurs in the current system, that problem cannot be solved by low rates. Similarly, a tax system with needless levels of complexity will impose heavy costs on the productive sector of the economy.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s