Do high or low taxes work better?

kw: policy, income taxes, analysis

In a recent campaign advertisement, President Obama states that Mitt Romney wants to lower taxes on the rich, expecting this to stimulate the economy and improve employment figures. He says, "That was tried. It didn't work then, and it won't work now."

I beg to differ, Mr. President. First of all, you are lying. Mitt Romney's proposal would indeed keep taxes for the rich from rising, while reducing taxes the most for working Americans with lower incomes. This latter fact is conveniently ignored in the campaign ad.

Look at this chart:

The dollar figures are all adjusted to 1983-4, when the Consumer Price Index was 100; it is 224 today and was about 30 in 1960. Also, these are marginal rates. In 1960 a family earning $50,000 (taxable income; actual gross may have been $60K-$75K) paid 20% on the first $30,000 ($6,000) and 22% on the rest (another $4,400) for a total of $10,400. Average tax rate was actually under 21% on taxable income, and was closer to 15% of the gross. (Actual 1960 dollars: taxable income about $6,600, income tax total $1,380)

I lived through all these years and remember them; I was thirteen in 1960. To pay down the national debt after World War II, Truman and Eisenhower really "soaked the rich". It was during the early 1960s that L. Ron Hubbard, objecting to being taxed nearly 90% (his books were making him rich), started the "church of Scientology" as a tax shield. The so-called "good life" was based on most Americans in the middle class, families earning the modern equivalent of $25K-$50K or so paid less than 20% of their gross income in taxes; also state income taxes were a lot smaller than they are today, and sales taxes seldom exceeded 3%; and corporate tax rates were lower for small business (but that's a subject for some other time).

Jack Kennedy was a conservative by today's standards. He lowered tax rates by about a tenth for most Americans, and by about one-sixth for the richest! Would any modern Democrat dare to reduce Warren Buffet's taxes by one-sixth? America prospered as a result, but not for long, because Lyndon Johnson came in with the "war on poverty", which has clearly made poverty worse instead of better. I don't have much else to say for the Johnson and Nixon presidencies. The Vietnam war drove fiscal policy, which was in a shambles throughout.

Then came Jimmy Carter. He raised taxes on most of the middle class and the near-rich, but lowered them on the richest among us (I never could figure that out). That and his other ham-handed policies led to inflation that approached 20% and the invention of the "misery index".

In two steps, Ronald Reagan, with Tip O'Neill's help, lowered taxes for nearly everybody, but raised the minimum tax from zero to 15% for the lowest tax bracket, claiming this was "fair." America evidently thought so. This led to a huge boom in the American economy, and although those years began with a rise in the national deficit, this was shrinking rapidly by 1992, and continued right through the early Clinton years. The "Clinton surplus" was largely Reagan's doing.

When Bill Clinton raised taxes in 1993, it took a few years to stop the "Reagan revolution", but by 1998 the economy was on another downturn. His legacy to "W" was the 2000 recession.

George W. Bush, in spite of two wars, was able to get taxes reduced a little in 2003. At the same time, banking regulations were loosened up, which added to the prosperity, but eventually were seen to be a mistake, because it became too easy for the greedy to manipulate, and the crash of 2008 was the result. However, 1990's-era regulations have not been reinstated, so it could happen again.

The 2003 tax bill was temporary, and will sunset at the end of this year. Members of congress are bickering over which provisions of the law to convert to permanent law. Of course, modern Democrats want to "soak the rich", but the history I have lived through shows that such policies damage the economy.

In 2011, one-tenth of American taxpayers paid 72% of the income taxes. They are already being soaked. At the same time, between 47% and 49.5% (depends whom you consult) paid no taxes, but not because there is a zero rate at the lowest marginal bracket. Rather, more subtle factors are involved:

• The EITC (Earned Income Tax Credit), which began in 1975 under Johnson; part of the War on Poverty. For a family of 4 with taxable income of $17,000, this amounts to nearly $5,900, "credited" against a much smaller tax bill (a few hundred), so such families are actually paying a negative tax. The EITC phases out at $45,000, for a 4-person household.
• The Standard Deduction, begun in 1944. It is presently $11,900 for a married couple.
• Personal and Dependent Exemptions. It was $3,800 in 2011, so $15,200 for a family of four. Exemptions are deducted after AGI is calculated.

I'll leave the math to you. The combination of credits and exemptions and deductions result in an effectively zero (or below) tax rate for most households with a gross income less than $35,000. Compare that with a poverty threshold of about $23,000 for a family of 4. This year, it is estimated that just over 15% of Americans are poor, according to the thresholds (which differ by family size and age). These folks truly do need a hand, and zero income tax is one useful means to help. But from 15% to 47% or so, is at least 32% who pay no taxes, but ought to.

Who will pay the most if the "Bush bonus" expires in January 2013? Everybody except the middle class! The lowermost tax rate, currently 10%, will go up to 15%. Your payroll deduction will jump by half, if you are making less than about $20,000. Then those with taxable income between $69,000 and nearly $140,000 will see a rise from 25% to 28% (about one-eighth), those from $140,000 to $212,000 will see a rise from 28% to 31% (about one-ninth), and the richest will see a rise to as high as 39.6% (about one-seventh).

Many say of those in the top brackets, "So what? They can afford it." The people in the top brackets, those paying 25% and up, are already paying three-fourths of all income taxes. Do you want them to pay 100%? Where is your self respect? Can your conscience allow you to accept services for which you have paid nothing? If so, you must be a true liberal.

Think over the points in this post. The President has lied and misled the public with these campaign ads. "Trickle down economics" has worked several times in the past. Mitt Romney is proposing that we let it work again. President Obama has increased the national debt by $4 trillion in three years. The recession is not over, and unemployment remains over 8% officially, but is actually 15% when you count those who no longer qualify for unemployment insurance payments, but still aren't working. Can we afford five more such years?