Originally posted 06/18/07
We all know the mantra by now, espoused by financially illiterate but politically motivated newspaper and magazine editors, network news delivery people, liberal bloggers and Democrats, “Bush’s tax cuts only further enrich the rich and resulted in huge deficits.” I dare to say even one of the Long Beach Post’s intrepid publishers, Shaun Lumachi, bought into this refrain in a Post on March 27th (using 60 Minutes interview with head of the Government Accounting Office—who was appointed by Clinton and combining him with 60 Minutes is unbiased right?). To this mantra I say, “Bullcrap.”
One reason you can tell this is not true, as George Will pointed out in his column last week, is because Democratic Presidential candidates who miss no opportunity to bash Bush have said practically zero about the economy. Before you scream, “but Will is conservative and a Bushie”—no he is not (a Bushie) read his articles and you will find few established conservative opinion writers who have taken Bush to task more than George Will. If the economy were in bad shape, heck even if it was just flat the past year or so, you can bet every Presidential candidate would be screaming about it. However the economy is not in bad shape and has had the longest period of growth in post World War II history. Further, unemployment has been incredibly low for over six years and the number of small businesses that have started has expanded dramatically (note as well then never has there been such a growth in minority and women owned businesses as there have been since 2000). No, this is not a good subject for Democrats to try to politicize.
But I wish to base my statement not on the lack of rhetoric from political candidates but on facts and numbers. Looking at IRS records since the Bush tax cuts went into effect tax revenues have soared—up over 30% since 1999. The total dollars paid by “the enriched rich” grew substantially more than those at the bottom tax brackets and the percentage of tax revenue received from the upper tax bracket as percentage of overall taxes received has also grown. Our federal deficit obviously is not because of tax cuts since revenue has increased substantially. Our deficit is because of spending, which has grown considerably more than revenues.
Quite simply, since Bush took office his Administration and Congress have over-spent. Imagine if you were given annual raises of $12,000, would you increase your household spending by $20,000 per year? No? But that is what our Federal Government has been doing for the past six or seven years. When the tax cuts were enacted Bush stated they would help our economy grow and tax revenue would increase—he was right on both accounts. What he did not say was, “and I will conspire with Congress to make sure we waste the increased revenue and spend even more.”
Bush and his tax advisors were basing their prediction of tax revenue increasing despite cutting the tax rates on the The Laffer Curve which has been proven correct through history, decrease how much you take from an individual due to his or her labor and they will work to produce more. The U.S. cuts tax rates across the board and revenue shoots up, Iceland cuts corporate tax rates from 45% to 18% and revenue triples—a one third cut in taxes results in three times more revenue. The Laffer Curve has been proven over and over throughout history in every country that has taxes—higher taxes, lower revenue; lower taxes, higher revenue.
Unfortunately the tax cuts are due to expire in 2010 and we will see the resulting effect of a decrease in tax revenue—and you know we will not see a corresponding decrease in Federal spending. Many on the left cheer this forthcoming tax increase as it will make the tax system “more equitable” and the rich will “pay their fair share” (ignoring that currently the upper tax brackets account for somewhere near 80% of all tax revenue despite being less than 5% of income earners). The increase in tax rates however will produce the opposite affect—it will hurt the lower brackets more than the upper.
Yes, the expiration of the current tax rates will actually hurt lower income earners far more than upper tax earners. Why? Because their tax rates will increase the most—and they will take home a far smaller percentage of pay after taxes.
Example:
Currently a young couple both earning $30,000 a year with one child gets a $1000 child tax credit and pays 15% of their income in taxes, assuming no deductions they pay $60,000 x 15% – $1,000 = $8,000 federal income tax. In 2011 after the increase in rates they will go back to the 28% bracket of 1999 and the child credit drops from $1000 to $500, they will pay: $60,000 x 28% – $500 = $16,300 in taxes, more than double, or an increase of 14% of their income.
Another couple earn $500,000 a year, no child tax credits but are in the upper bracket currently at 35% and pay $500,000 x 35% = $175,000 of their income in taxes. In 2011 they revert to the 1999 upper bracket of 39% and will pay $500,000 x 39% = $195,000, an increase of $20,000.
Who is hurt worse in this scenario? Not the upper income earners, the lower income couple pays significantly more of their income in taxes and has significantly less money to spend or save.
What about the capital gains and dividend tax increases, surely that will fall mostly on the wealthy? Sure there will be some pain in the upper echelons as investments are taxed at a higher rate, but chances are there will also be a tremendous decline in investment from the upper income earners because of this. Further in some markets the lower income earners will be hurt as the reversion to the old tax code for capital gains will result in fewer investment properties changing ownership—which means less investment in improvements and fixing up the rental housing stock. Less investment means fewer new businesses and entry level jobs. Less investment means less capital for current businesses to expand and add jobs.
More importantly the reverting to previous tax rates for capital gains and dividends will really hurt middle income earners who are investing in retirement accounts and saving in mutual funds. The vast majority of 401(k), IRAs and other personal retirement accounts are invested in mutual funds. Mutual funds are not immune from taxes, especially capital gains and dividends as they make equity and investment purchases and sales. The return on investment on mutual funds will decline as a result of the higher tax rates resulting in lower returns for investors and ultimately lowering the asset base for retirement.
Retirees will be hit harder than the wealthy as the tax rates on income and distributions from their retirement accounts will increase, resulting in lower incomes for them to subsist on in retirement. As well fewer jobs will mean less contributions to Social Security and Medi-care putting even more pressure on a system ready to collapse which would affect tens of millions of Baby Boomers starting to retire.
Democrats love to campaign on the “little guy” platform, John Edwards is making a campaign talking about poverty in America (as he charges $50,000 to places like the University of California Berkley for a speech). Class and income disparity are favorite subjects—but actions speak louder than words and the current Congress appears committed to impoverishing the lower income groups while barely affecting the wealthiest due to allowing the current tax rates to expire. Frankly most of the Americans affected are either too trusting of what they are being told by “their party”, or too lazy to check to see how they will be adversely affected, or too uneducated in economics and math to even figure out what will happen to them in 2011. When the current tax rates are repealed the least affected will be the top one to five percent of income earners in the upper bracket, as you go down the tax rate scale the negative affect increases disproportionately so in the end many of those earning in the bottom brackets will see their tax bill go up as high as fifty percent.
Lower taxes create jobs, investment and positive economic growth that affect all levels of income—but mostly those at the lower end. Increasing tax rates will result in higher unemployment, reduced growth in retirement accounts, lower consumer spending as a result of significantly lower take home pays, declines in manufacturing and housing. Increasing tax rates has the exact opposite effect that those in favor of income redistribution desire: they widen the income gaps between wealthy, middle income and lower income earners.
Democrats and Republicans can complain all they want about the Federal deficit, but put the blame where it belongs: spending and spending and then adding ear-marks and pork and spending more. If you hear someone blame the deficit on the Bush tax cuts hold onto your wallet, they know not of what they speak and chances are they want more of your money to spend.
Chances are I will put a “Hillary ‘08” sticker on my car before any Democrat calls for making the current tax rates permanent…at this rate same goes for Republicans as well.