The Trump Administration and the Congress are about to tackle the thorny task of trying to revise the tax code. I can easily predict where that’s going to lead. One of the Democrat Party mantras for the past several decades has been that the government needs to increase the tax burden on the highest earners because “the rich don’t pay their fair share.”
Let me begin by commenting on the philosophical question of “what is fair?” Since the beginning of time, children have complained “that’s not fair” when some other child got something they didn’t, or got more of something than they did.
In recent decades, liberals (of all political persuasions) have started using the issue of “fairness” as a social-engineering tool. Is it fair that only the good athletes get to play on the high-school football team? According to the liberals—no. Anyone who wants to play on the team should be allowed to play. After all, the little fat kid’s parents pay school taxes, too.
Since politicians (of all political persuasions) seem to think their main function is to tax and spend, they are constantly looking for new sources of revenue. An obvious source is the income tax, but there’s a problem with that. The people being taxed don’t just earn money and pay taxes—they also vote. Increasing taxes on voters is at best a risky business.
So let’s think about this. There are currently an estimated 180 million voters in the U.S. That means there are about 36 million voters in each 20 percentile of the population. If we leave the bottom 80 percent alone (144 million voters) and just raise taxes on the top 20 percent, we’ll probably be okay. That gives us 144 million people who might be persuaded to vote for us, and only 36 million likely to vote against us.
Taking that reasoning one step further, if we just raise taxes on the top 10 percent, leaving 162 million voters untouched, there’s even less risk we’ll get voted out of office.
Okay, let’s look at how much each of those groups makes and how much tax they pay. These are numbers for the 2015 tax year. Those are the latest full-year numbers available.
The bottom 20 percent make less than $24,200 per year. They earn about 4.5 percent of the total U.S. income. They pay -2.2 percent of the total income tax. Yes, you read that right. Negative 2.2 percent. In addition to keeping all the money they earn at their jobs, they get an additional check from the government.
The second 20 percent earns between $24,200 and $47,300. That’s about 9.3 percent of the total U.S. income. They pay negative 1.0 percent of the total income tax. They get checks from the government, too.
The middle 20 percent earns between $47,300 and $79,500. That’s 14.8 percent of the total U.S. income. They pay 5.9 percent of the total income tax.
(Actually, the bottom 26.5 percent of this group [another 9.5 million people] also get checks from the government. That means the remaining 26.5 million people actually have to pay 8.0 percent of their income to make the average come out right.)
The next 20 percent (the fourth) earns between $79,500 and $134,300. They earn 20.1 percent of the total U.S. income and pay 13.4 percent of the income tax.
Which brings us to the top 20 percent of earners, the rich people who supposedly aren’t paying their fair share. They make more than $134,300 a year. Collectively, they earn 51.3 percent of the total U.S. income—but they pay 83.9 percent of the total income tax.
If we look just at the top 10 percent, as we did above, we’re talking about people who make more than $180,500. Collectively, they earn 38.2 percent of the total U.S. income. They pay 73.1 percent of the total income tax.
Okay, by this time your eyes have probably glazed over, so I’ll present the information in the form of a table that will hopefully be easier to follow.
Notice that each of the lower four income groups paid less in tax than their share of the national income. Only the top 20 percent, the “rich” that the Democrats claim aren’t paying their “fair share,” pay more in tax than their share of the national income.
Which brings us full circle, back to the philosophical question of what is fair? If the top 20 percent of earners is already paying 83.9 percent of the total tax bill while earning only 51.3 percent of the income…and we don’t believe they’re paying enough…what would be enough? What would be fair? Should they contribute 90 percent of the total tax bill? Why not just make them pay all of it? They’re not far from that anyway.
But the most important question (in my opinion, anyway) is…who should have the right to decide what is fair?
Suppose a group of your coworkers went to your boss one day and said, “We realize he’s already doing 84 percent of the work around here, but we don’t think he’s doing enough. We think he should do more, so we could do less.”
What would be your reaction? I don’t think anyone could blame you if you decided to work somewhere else.
In all fairness, I must admit that Democrats practice what they preach. In the bluest of the blue states, like California, Oregon, New York, Connecticut, and Maryland, they have some of the highest taxes in the nation—and they tax everything conceivable. In addition to the federal income tax, residents pay state income taxes…in some cases, city income taxes…state sales taxes…in some cases, city sales taxes…real estate property taxes…personal property taxes (that’s your car, your boat, etc.)…road use taxes…the list goes on and on. It’s amazing what the politicians have figured out how to tax.
The state of Maryland even taxes rain. Seriously. They levy a rain tax based on the square footage of your roof. The bigger your house, the more you pay for draining away the rain water that falls on it.
I’ve read that a person in the top 20 percent of earners in places like California and New York, on average, pay more than 55 percent of their income in federal, state, and city taxes.
But according to the Democrats, they’re not paying their “fair share.”
The 2016 federal budget was about $3.9 trillion. Total government income from all sources was about 3.3 trillion. That left a shortfall of about $600 billion.
Where did that $600 billion come from? We borrowed it and added it to our national debt. As of this writing, the national debt totals somewhat more than $19.8 trillion.
Is there some other way to cover that $600 billion shortfall? Of course. There are three possibilities, in fact.
- We can reduce the size of government. Employ fewer people. Provide fewer services.
- We can raise taxes.
- We can lower taxes.
Wait…what? I understand how we could get another $600 billion by raising taxes, but we could get the same amount by lowering taxes? How could that be?
Well, it depends on who you listen to. The Democrats treat the economy as static. Therefore, lowering the tax rate will result in less tax revenue being collected by the government. That will increase the amount that has to be borrowed, and the national debt will grow even larger.
The problem with that theory is that it’s incorrect. It’s impossible for a free-enterprise economy to be static.
In a socialist economy, the government is in charge of everything—but in a free-enterprise economy, no one is in charge. Really. A free-enterprise economy is made up of tens of millions of individuals, each one acting in what he thinks is his own best interest.
If there’s a surplus of pizzas, Domino’s will close some of their stores. The Burger King people will do nothing.
If there’s a shortage of bacon, pig farmers will raise more pigs. Cattle ranchers will do nothing.
According to the Congressional Budget Office, during the eight years of Obama’s reign the economy grew at an average annual rate of about 1.9 percent. So what would happen if the economy in late 2017 is ticking along at the same tepid 1.9 percent growth rate and the Congress dropped the corporate tax rate from its present 35 percent to—oh, let’s say 20 percent, which I consider more realistic than the 15 percent rate the President campaigned on?
The immediate effect—literally the day after the bill is signed into law—would be an increase of 15 percent to 20 percent in corporate cash flow. Money that would have been set aside for taxes will suddenly be available for hiring more people, buying more equipment, opening new offices, and all the other things that free-enterprise corporations do. What about the little guy who owns a mom-and-pop grocery store or a franchise restaurant? He’ll suddenly have more money, too. Now he can hire more people and start planning that expansion he’s wanted for a while now.
What about lowering the personal income tax rates? Now we’re really talking some powerful effects. It would be like every worker in the nation getting a raise, because he would see more money in every paycheck. And what would he do with that money?
Let’s be honest—most of us would spend at least some of it. We might buy a new car a year sooner than we had planned…or take a nicer vacation…or put new carpet in the house.
And look at the follow-on effects of those things. Everyone in the automobile industry will benefit, from the manufacturer, to the trucker who hauls your new car to the dealership, to the salesman you buy the car from.
Everyone in the travel and leisure business will benefit from your vacation—the travel agent who books your trip, the airline you fly on, the hotels you stay in, the restaurants you eat at, the theme parks you visit.
“Ah,” the Democrats say, “but not everyone spends the money. Some people save it, or use it to pay off debts.”
That’s correct, but where does that money go? Back into the banks, where it will be loaned to the big corporation that wants to build a new office building, and the little mom-and-pop grocer who wants to expand his store, and the guy who wants to put new carpet in his house.
It’s like knocking over the first domino in a long row of dominos. As each domino falls, more people make more money, pay more taxes, and—here’s what’s really important—live better lives. The economy grows, the government collects more taxes, and unemployment goes down. It’s a win-win for each of us as individuals and for the nation as a whole.
But let’s go back to the original topic—should we make the rich pay more taxes? I don’t believe so, and that puts me in some pretty distinguished company. Two American presidents have agreed with me—and they did something about it.
In 2016, then-candidate Trump campaigned on a slogan of “Make America Great Again.” In 1960, then-candidate John F. Kennedy campaigned on the slogan, “Get America Moving Again.” Kennedy was the scion of one of America’s wealthiest families, and he knew what rich people do with their money. They invest it in ways that will make them even more money.
The companies they invest in use the money to hire more people, build more factories, and make more profit—some of which gets paid back to the rich people. It’s an upward spiral from which everyone benefits.
But if you raise taxes on the rich, they have less money to invest. That’s less money available to companies to hire people, build factories, and increase profits.
If you raise the taxes high enough, those rich people will invest their money in other countries, where the tax structure is more favorable.
When that happens, American companies and American workers get no benefit from the rich people’s investment.
Kennedy finally persuaded the Congress to lower the personal tax rates, and the rich benefitted the most. The top twenty percentile group went from a confiscatory rate of 91 percent to a much more reasonable 50 percent rate.
The result? The decade of the ‘Sixties was one of the best decades in history for the American economy. As the investment money flooded into large and small businesses, the economic growth numbers went from 2 percent to 3 percent, then 4 percent, and finally to more than 5 percent annual growth.
At the same time, unemployment went from 5.2 percent to 3.8 percent, and—pay attention, Democrats—tax revenue increased 62 percent.
The decade of the ‘Seventies was dominated by three liberal presidents—Nixon, Ford, and Carter—all of whom advocated for higher tax rates, especially on the top twenty percentile—the “rich.” By the time Ronald Reagan was inaugurated in 1981 the top tax rate had gone from JFK’s 50 percent all the way back up to 70 percent.
As a result, the period from Nixon’s inauguration in 1969 to 1981 was a time of rising unemployment, zero-to-negative economic growth rates, and inflation going into double digits.
In 1982 Reagan persuaded the Congress to lower personal tax rates across the board. In particular, he got them to cut the top rate from 70 percent all the way down to 28 percent. They also cut the corporate tax rate and closed numerous loopholes.
The result was even more dramatic than the boom that followed the Kennedy tax cuts. The economy grew at more than 5 percent a year until 1993, when Bill Clinton raised the top tax rate from 28 percent to 39.6 percent.
George W. Bush cut taxes again in 2001, dropping the top rate to 36 percent. That kept the economy strong until the economic collapse of 2008.
Topic of discussion for another day: By comparison, Obama’s program of massive government spending in 2009 (for “shovel-ready jobs” that didn’t exist) did nothing for the economy. As I stated earlier, during his eight-year tenure the economy averaged an anemic 1.9 percent annual growth.
So there you have it—more than half a century of history. Every time tax rates were increased—every time, without fail—the economy faltered, slowed down, sometimes even shrank.
And every time tax rates were cut, especially on the rich, the economy experienced rapid growth (which generated higher tax revenues).
Make the rich pay more taxes? Not if we want our economy to thrive.