Many in Congress are loathe to extend the “Bush” tax cuts especially for the rich. Those against extension claim that tax hikes are necessary to help decrease the deficit. They apparently are ignorant of both history and something called Hauser’s Law:
“Over the past six decades, tax revenues as a percentage of GDP (gross domestic product) have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90).”
This happens because “Under a tax increase, the denominator, GDP, will rise less than forecast, while the numerator, tax revenues, will advance less than anticipated. Therefore the quotient, the percentage of GDP collected in taxes, will remain the same. Nineteen percent of a larger GDP is preferable to 19% of a smaller GDP.” (WSJ)
History of tax rates versus government revenue is summarized by the Heritage Foundation:
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.
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:
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)
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:
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).
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.
History shows that the best way to “tax the rich” is to lower the tax rates. This isn’t just some conspiracy between conservatives and the rich; the principle was well-known to our founding fathers. Of course there were no income taxes then, but there were taxes on goods.
In Federalist Paper #35 (modern English edition) we find this advice:
“…[if] the government needed more revenue it would increase taxes and try other experiments like adding penalties. For a while tax revenues would increase— until people found ways to elude the new taxes. Government officials would get the false impression that raising taxes also raises the amount of money going into the federal treasury. This false impression would take a long time to correct. Necessity, especially in politics, often occasions false hopes, false reasoning, and a system of measures correspondingly erroneous…
” Taxation policy requires extensive information and a thorough knowledge of political economic principles. Anyone who understands these principles will not want oppressive taxes nor will they want to sacrifice any group of citizens to get more tax revenue.
“The most productive system of obtaining governmental revenue will always be the least burdensome. In order to tax judiciously, the person with the power to tax should understand the general characteristics, habits, and thinking of the people, and the country’s resources. Let every thinking citizen judge for himself who has the required qualifications.”
H/t to Mary Webster, OregonLive,com.