The sheer volume of demagoguery surrounding the subject of taxes demands that I take some time to dispel a few of its biggest myths.
The myth repeated most often is the idea that tax cuts “cost” the government money, which is wrongheaded on at least two levels. The first issue is that revenue from income taxes does not belong to the government, but rather to those under the threat of IRS persecution who were coerced into handing over their cash.
Politicians arguing that tax cuts cost the government are like schoolyard bullies, whining when their victims suddenly decide to only give them a quarter of their lunch money instead of half. Contrary to the myths, history proves that cutting taxes leads to increased economic activity, which actually swells the government’s coffers.
In 1964, the tax cuts that JFK pushed for before his death enacted, which lowered the top tax rate from 90 to 70 percent and the bottom rate from 20 to 14 percent in 1965. IRS data shows a small drop in individual tax revenue that year, but then revenues exploded from $53.7 billion to $159 billion in 1976, a rise of close to 300 percent. Inflation over that period was around 80 percent, therefore the growth in tax revenue was overwhelmingly due to increased economic activity.
Over the course of Reagan’s two terms, the highest inflation rate decreased to 33 percent and the system was dramatically simplified from 16 different tax brackets down to four. The rates stayed roughly the same until Clinton raised them in 1993, but individual income tax revenues almost doubled between 1980 and 1992 – again far exceeding the rate of inflation.
The picture during the 2000s is less clear with contributors warping economic data such as the dot-com crash, 9/11, two wars and the complex phasing in of the Bush tax cuts.
However, government collections from economic sources that rose in 2001 later fell in the wake of that year’s events, but increased again even faster between 2003 and 2008, after which the effects of the most recent recession came into play.
Even President Obama implicitly recognizes that lowering taxes encourages greater economic activity. Otherwise, why would he give impassioned speeches touting his plans to fix the current economic malaise by helping “small businesses upgrade their plants and equipment,” and persuading “large corporations to get off the sidelines and start putting their profits to work” by giving them tax breaks for investment?
Obviously, he understands that the way to persuade people and companies to invest in the economy is to increase the potential rewards for that risk and accept the stimulative effect of tax cuts as fact.
Unfortunately, the Congressional Budget Office, which pundits and politicians invariably cite when claiming that tax cuts “cost” the government money by increasing deficits, does not recognize the relationship between lower taxes and greater economic activity. Amazingly, the CBO reports display an utter detachment from reality in predicting GDP growth of 4.5 to 5.6 percent and an easing of unemployment to five percent between 2012 and 2020, regardless of the tax policies enacted over those years.
Another whopper told about the Bush tax cuts is that they benefit only the rich. However, factual analysis reveals that if extended to 2020, less than 19 percent of their value will benefit upper income taxpayers. This is according to the Tax Policy Center of the Urban Institute and Brookings Institution, hardly a bunch of right-wing firebrands.
The truth is, with or without the Bush tax cuts, those with higher incomes pay more than their “fair share” of federal income taxes. In 2007, the top one percent of earners, defined as those making more than $410 thousand per year, earned 22.83 percent of all personal income but paid 40.42 percent of personal income taxes. The numbers for the top five percent, defined as those earning more than $160 thousand, are even more lopsided as their share of income was 37.44 percent while their share of taxes was 60.63 percent.
Yet, none of this gets to the root of America’s tax problems. For example, the truly wealthy, whose income is derived mostly from investments, pay lower rates on their capital gains and dividends than many do on hourly wages or salaries. In reality, the government levies the highest tax rates against those who happen to be successful in their occupations, perversely providing a huge disincentive to seek greater success.
It might seem simple to address this problem by raising the tax rates on these sources of income, but that would be disastrous. Investment enables companies to grow, hire more workers and research new technologies, but only at the risk of losing money if the company fails. If rewards decrease by higher taxes on capital gains and dividends, the inducement to invest in the first place decreases.
Real progress on taxes will require more than adjusting rates a bit here and there or tweaking the code with incentives for this or that. All that does is make the system more vulnerable to the lobbyists. To abolish the favoritism and social engineering of the current tax code, encourage greater prosperity, and make the system truly equitable, we must stop taxing income and start taxing economic activity.
What we need is the Fair Tax, so check it out at www.fairtax.org.
Ben Rudnick is a Collegian Columnist and can be reached at [email protected].
Hank Van Gieson • Sep 17, 2010 at 3:09 am
MaxSt,
Re: Your Sept 17, 12:57 post.
(1) The constitutional issue is not over sales taxes in general, which are certainly OK. The issue is whether or not the federal government can tax State and Local government consumption as proposed in HR25. According to several Yale constitutional scholars, that would be unconstitutional under our federal form of government. Have you overlooked the fact that our republic consists of two sovereign powers, Federal and State? Sovereign powers do not tax each other. As Justice Marshall once wrote, “the power to tax is the power to destroy!” For 200 plus years, the Supreme Court has been guided by the doctrine of “intergovernmental tax immunity”, and should strike down this portion of HR25 when challenged by the States.
(2) I stand by my comments that seniors would be penalized by forcing them to resume paying for their federal benefits with their sales tax dollars, and double taxing their after tax savings. After paying my FICA premiums for 45 years or so, why should I be asked to resume paying? That would be like an insurance company telling a new widow that the company will certainly pay the death benefits, but the widow will have to continue to pay the premiums. That will never happen, imho. To help you understand the issue, I offer a solution of a two tier sales tax system wherein when retirees qualify for their benefits, they be given a card that reduces their sales tax from 23% to 14%, thus doing away with the unfairness of this issue.
Double taxing after tax savings is clearly unfair, and your argument that we all are double taxed under current law due to the “embedded taxes” makes no sense. Businesses pay utility bills and embed those costs in their retail prices, but that doesn’t impact my utility bill at all. Businesses pay rent and include those costs in their prices, but that doesn’t change my rent one thin dime. And, yes, businesses pay taxes and include those costs in their prices. But how can you possible believe that my individual tax burden is affected? Embedded costs affect only one thing and that is price. We are not double taxed today, and clearly would be under the Fairtax!
(3) I am not for or against the poor or whatever your rant suggests. I am for everyone contributing something to the cost of the federal government, and the Fairtax creates 30 million “free loaders” due to the prebate. Under current law, at least workers pay the 7.65% FICA even if they pay no income tax. Less than 1 million can collect refundable tax credits in an amount that would totally offset the FICA costs. Do you really think that having 30 million working families disconnected from the cost of the federal government is a good idea?? I don’t!!
Finally, you suggest that I have to choose between the income tax and the Fairtax. Not true! I agree that a consumption tax would be better for our nation than the income tax. Arguments for that are very compelling. But the Fairtax scheme is not the way to get there. I have long advocated what I call “Fairtax-Lite”, a tax reform plan that gets rid of just the income tax and replaces it with a consumption tax of around 10%. No taxation of governments, a targeted prebate, retains the payroll and gift/estate taxes, and phases in over five years or so. Such a plan might be far more likely to get Congressional consideration than HR25 which has languished in committee for 12 years with nary a hearing. Stay tuned!!
MaxSt • Sep 17, 2010 at 1:53 am
“Eli Gottlieb says:
September 16, 2010 at 5:38 pm
Under a consumption-based tax system with a “prebate”, couldn’t we still tax capital gains? It seems that eliminating taxes on labor and savings while taxing capital and consumption would, unlike most other proposals, actually start to ameliorate some of the structural problems with our economy”
Under the Fair Tax all taxes on income are repealed. If you want to tax one section of income, you’ll need to tax all sections of income. The Fair Tax has companion legislation that starts the process for the repeal of the 16th amendment. It is “companion” legislation because the process of a constitutional amendment is a longer process than just gutting the income tax code. Once the amendment passes, how would that effect the legality of any tax on income?
MaxSt • Sep 17, 2010 at 1:43 am
“What about senior citizens, retired people, and anyone on a fixed income?
As a group, seniors do very well under the FairTax. Low-income seniors are much better off under the FairTax than under the current income tax system.
Some erroneously believe that people who live exclusively on Social Security pay no taxes. They may not know it, but they are paying hidden corporate income taxes and employer payroll taxes whenever they buy anything. Under the FairTax, seniors pay $0.23 out of every dollar they choose to spend on new goods and services.
Plus, seniors, like everyone else, receive a monthly prebate, in advance of purchases, for taxes paid on the cost of necessities which more than pays for all of the taxes they would pay if they received the average Social Security benefit amount and spent it all. If seniors choose to work, they are freed from regressive payroll taxes, the federal income tax on wages, and the compliance burdens associated with each. They pay no more hidden taxes on goods or services, and used goods are tax free. There is no income tax on their Social Security benefits.
The income tax imposed on investment income and pension benefits or IRA withdrawals is repealed. Pension funds, IRAs, and 401(k) plans had assets of $12 trillion in 2004. An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal, but are not required to do so under the FairTax.
All owners of existing homes experience large capital gains due to the repeal of the income tax and implementation of the FairTax Plan. Seniors have dramatically higher home ownership rates than other age groups (81 percent for seniors compared to 65 percent on average). Homes are often a family’s largest asset. Gains are likely to be in the range of 20 percent.
The FairTax makes the economy much more dynamic and prosperous. Consequently, federal tax revenues grow. This makes it less likely that federal budget pressures require Medicare or Social Security benefit cuts.” What about seniors, retired people and anyone on a fixed income? FAQ #16
“What do we experience in the transition from the income tax to the FairTax?
Everyone will have to think about taxes in a different way. Income — what we earn — no longer has to be documented, measured, and tracked for tax purposes. The only relevant measure of our tax liability is the amount we choose to spend on final, discretionary consumption. Tax-related issues are suddenly a lot simpler and more straightforward than they used to be. The aggravation and anxiety associated with “April 15th ” disappears forever after passage of the FairTax. The FairTax is not new — most Americans come into contact with sales taxes daily, since 45 states currently use them to collect state revenues. It is easier to switch from an income tax to the FairTax system than it is to switch from gallons to liters, or from feet to meters! Of course, those who depend on the structure and complexity of our current system (e.g., tax lobbyists, tax preparers, and tax shelter promoters) will have to find more productive economic pursuits. However, everyone will have enough advance notice to adjust to the new system.
Job creation booms. Residential real estate booms. Financial services boom. Exports boom. Retail prospers. Farming and ranching prosper. Churches and charities prosper. Civil liberties are enhanced. In short, it is difficult to imagine the far-reaching, positive effects of this change. Though this tax policy is exactly what our Founding Fathers counseled us to do with the Federalist Papers and the Constitution.” What do we experience in the transition from the income tax to the FairTax?
“How does the FairTax help seniors who have paid taxes on their retirement savings or invested in Roth IRAs?
Simply put, the FairTax is a revenue-neutral proposal, raising no more money than does the current system. The FairTax only changes where the money is raised, not the amount.
Additionally, some erroneously believe that people who have invested in Roth IRAs will never pay taxes on this money again. They may not know it, but they are paying corporate income taxes, employer payroll taxes, plus the associated compliance costs that are hidden in the price of every retail purchase they make. Under the FairTax, these hidden taxes are driven out of retail prices. And note, they can determine the amount of tax they pay through their own lifestyle choices.
Furthermore, used goods are not taxed because they have already been taxed once — when they were new. Therefore senior citizens, like all Americans, do not lose purchasing power, but gain it instead. Moreover, the FairTax preserves the purchasing power of Social Security benefits, and seniors receive a monthly prebate so they don’t pay taxes on the purchase of necessities. Tax-deferred investments get a one-time windfall. Savings invested in any long-term, income-generating asset such as a stock, real estate, or a long-term bond that can’t be called, increase substantially in value. Finally, complex estate planning is an artifact of an earlier age.” How does the FairTax help seniors who have paid taxes on their retirement savings or invested in Roth IRAs?
MaxSt • Sep 17, 2010 at 12:57 am
“No argument that a tax on consumption would be better for our economy than the income tax. But the Fairtax as described in HR25 is a very bad plan
(1)Fairtax proposes that the federal government tax State/Local government consumption, which is clearly unconstitutional under our federal form of government!”OK. How that fits with 45 states having a sales tax and, some, an income tax as well, I don’t know or the fact the Constitution gives them power to raise “duties, excise taxes and imposts.” The 16th added the income tax. Care to elaborate?
(2) Fairtax throws seniors “under the bus” by (a) forcing retirees to resume paying for their hard earned government pensions and health care with their sales tax dollars, and, (b) double taxes all their after tax savings when spent.In some cases, social security benefits are taxed (again, once when the money was earned) as income. As far as that goes, under the income tax, unemployment benefits are taxed. Under the Fair Tax, neither would be subject to taxation, workers receive their full paychecks, retirees are not penalized, again, when even their “tax-deferred” income is received in retirement. Under an income tax, since the worker did not put 100% of his paycheck into his retirement fund as he earned that money, he was taxed on a portion as he earned it, only to be taxed again when he receives it. How fair is the income tax? Under the Fair Tax, they would neither be taxed when they earn it or receive it. Not only are there retirement funds not in danger of being taxed, they receive a prebate each month (based on household size, not income) equivalent to the tax rate * poverty level. How does that “throw seniors under the bus?”
“(3) The Fairtax Family Consumption Allowance (prebate) would not only be the largest single entitlement in our history, but would create a group of 30 million working families that would pay no net federal tax annually. Yet, they would all qualify for full pension and health care benefits when eligible. Compare that to the less than 1 million workers that both pay no income tax and qualify for refundable tax credits such as the EITX and Child Care in an amount that totally offsets their 7.65% payroll tax. Is having 30 million workers disconnected from the cost of the federal government a good idea? I don’t think so!”OK. Question. Are you for the poor or against the poor? You start by defending “poor seniors” and end by attacking “poor” everyone else. Can’t make up your mind? Is attacking “the rich” next?As it stands today, roughly only half the popualtion even files a return. Of those that file, fewer still pay any taxes. The majority receive refunds. Thanks to variations in “soak the rich,” “help the poor,” “elect us as your saviour” arguments used by both parties, it is the nonpayers that have been shaping the debate and tax policy and all of it is done under the income tax They set the policy under which everyone else has to live. Under the Fair Tax, for once in decades, everyone has “skin in the game” and a vested interest in keeping rates low for everyone and everyone benefits from not being taxed on income. How effective would the typical “elect us so we can defend you, protect you, get your tax money back to you, be your saviour” arguments going to be if they have not gotten their hands on any tax money from us through payroll deductions to “hold hostage” from the start? Also, under the Fair Tax, there isn’t an EITC or any deductions. There would be no income tax therefore, no need for deductions. Even registration for the prebate is voluntary and not a requirement. Try ‘voluntarily’ not filing an income tax return and see how that goes.
“The Fairtax is fair in name only. You should take the time to read some of the unbiased studies that are out there. Reading a couple of “comic books”, written by a radio talk show host and an obscure, soon to be retired Georgia Congressman does not tell the whole story!” Been there, done that and included the ‘flat’ income tax in my studies. Remember our present system started as a flat tax of 7% that would effect only “the very richest among us.” How did that work out?The Fair Tax is still number one, IMO, and the most researched tax reform plan bar none, fact. By “unbiased” do you mean “unbiased” Democrats or Republicans who use the income tax as their favorite “power” tool, “unbiased” CPAs, economists or lobbyists who make a living off the income tax at our expense or “unbiased” journalists who have their own political philosophy whether left or right? To me, it seems conceited to claim “unbiased” anything when everyone has a bias and, of course, the subtle implication being that you hold a superior position as the, apparently, only unbiased position on the face of the earth. What “comic books” have you been reading? (See, everybody can do it) I truly do not mean to appear uncivil and hope that is not the case. However, I do mean to be straightforward and hopefully make you think. Which do you prefer? Our present system or the Fair Tax? Personally, I prefer the Fair Tax and will support it until/unless something better comes along.Cheers.“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.” –Winston Churchill
Hank Van Gieson • Sep 16, 2010 at 8:17 pm
Ben,
Why on earth would you believe that the States would approve a Constitutional Amendment which would allow the federal government to tax State/Local government consumption? Never happen!! A much simpler solution would be to eliminate that feature in the legislation, and raise the Fairtax rate appropriately to make up for the lower tax base.
I’m encouraged that you knew about some of the transition issues, particularly those affecting seniors. HR25 is not written on clay tablets, (yet), so why not act to revise the legislation and perhaps eliminate some of the criticisms? HR25 hasn’t gone anywhere in the last twelve years, not one hearing, and the number of cosponsors is diminishing. Isn’t it time to work with Linders replacement and try to get something that will attract more Congressional support?
Eli Gottlieb • Sep 16, 2010 at 5:38 pm
Under a consumption-based tax system with a “prebate”, couldn’t we still tax capital gains? It seems that eliminating taxes on labor and savings while taxing capital and consumption would, unlike most other proposals, actually start to ameliorate some of the structural problems with our economy.
Ben Rudnick • Sep 16, 2010 at 8:48 am
Thanks for the constructive response.
The Fair Tax would require an Amendment to the Constitution, as well as the repeal of the 16th Amendment, which is all listed on the Fair Tax website.
As for the seniors, the issue of the prebate (and its effects), and the studies regarding the other problems with the Fair Tax, I am aware of all these issues. However, the Fair Tax is the best developed, complete plan for switching our system from one that taxes income to one that taxes consumption that I have seen. As such, it seems the most logical one to use as a basis for a final plan. At the very least, I think people should familiarize themselves with it, and some of the flat tax plans that are out there, to see how different groups describe the true insanity of our present system.
Ben Rudnick
Hank Van Gieson • Sep 15, 2010 at 10:33 am
Ben,
No argument that a tax on consumption would be better for our economy than the income tax. But the Fairtax as described in HR25 is a very bad plan
(1)Fairtax proposes that the federal government tax State/Local government consumption, which is clearly unconstitutional under our federal form of government!
(2) Fairtax throws seniors “under the bus” by (a) forcing retirees to resume paying for their hard earned government pensions and health care with their sales tax dollars, and, (b) double taxes all their after tax savings when spent.
(3) The Fairtax Family Consumption Allowance (prebate) would not only be the largest single entitlement in our history, but would create a group of 30 million working families that would pay no net federal tax annually. Yet, they would all qualify for full pension and health care benefits when eligible. Compare that to the less than 1 million workers that both pay no income tax and qualify for refundable tax credits such as the EITX and Child Care in an amount that totally offsets their 7.65% payroll tax. Is having 30 million workers disconnected from the cost of the federal government a good idea? I don’t think so!
The Fairtax is fair in name only. You should take the time to read some of the unbiased studies that are out there. Reading a couple of “comic books”, written by a radio talk show host and an obscure, soon to be retired Georgia Congressman does not tell the whole story!