By Thomas Sowell
Jewish World Review May 17, 2011
We could definitely use another Abraham
Lincoln to emancipate us all from being slaves to words. In the midst of a
historic financial crisis of unprecedented government spending, and a national
debt that outstrips even the debt accumulated by the reckless government
spending of previous administration, we are still enthralled by words and
ignoring realities.
President Barack Obama's constant talk about "millionaires and billionaires"
needing to pay higher taxes would be a bad joke, if the consequences were not so
serious. Even if the income tax rate were raised to 100 percent on millionaires
and billionaires, it would still not cover the trillions of dollars the
government is spending.
More fundamentally, tax rates-- whatever they are-- are just words on paper.
Only the hard cash that comes in can cover government spending.
History has
shown repeatedly, under administrations of both political parties, that there is
no automatic correlation between tax rates and tax revenues.
When the tax rate on the highest incomes was 73 percent in 1921, that brought
in less tax revenue than after the tax rate was cut to 24 percent in 1925. Why?
Because high tax rates that people don't actually pay do not bring in as much
hard cash as lower tax rates that they do pay.
That's not rocket science.
Then and now, people with the highest incomes have had the greatest
flexibility as to where they will put their money. Buying tax-exempt bonds is
just one of the many ways that "millionaires and billionaires" avoid paying hard
cash to the government, no matter how high the tax rates go.
Most working people don't have the same options. Their taxes have been taken
out of their paychecks before they get them.
Even more so today than in the 1920s, billions of dollars can be sent
overseas electronically, almost instantaneously, to be invested in other
countries-- creating jobs there, while millions of American are unemployed. That
is a very high price to pay for class warfare rhetoric about taxing
"millionaires and billionaires."
Make no mistake about it, that kind of rhetoric wins votes for political
demagogues-- and votes are their bottom line. But that is totally different from
saying that it will bring in more tax revenue to the government.
Time and again, at both state and federal levels, in the country and in other
countries, tax rates and tax revenue have moved in opposite directions many
times. After Maryland raised its tax rates on people making a million dollars a
year, there were fewer such people living in Maryland-- and less tax revenue was
collected from them.
In 2009, many people specializing in high finance in Britain relocated to
Switzerland after the British government announced plans to take 51 percent of
high incomes in taxes.
Conversely, reductions in tax rates can lead to more tax revenue being
collected. After the capital gains tax rate was cut in the United States in
1997, the government collected nearly twice as much revenue from capital gains
taxes in the next four years as in the previous four years.
Similar things have happened in India and in Iceland.
There is no automatic correlation between the direction in which tax rates
move and the direction in which tax revenues move. Nor is this a new discovery.
Back in the 1920s, Secretary of the Treasury Andrew Mellon pointed out that
people with high incomes were simply not paying the high tax rates that existed
on paper, because they were putting their money into tax shelters.
After the tax rates were cut, as Mellon advocated, investments flowed back
into the private economy, producing higher output, rising incomes, more tax
revenue and more jobs. The annual unemployment rate in the next four years never
exceeded 4.2 percent, and in one year was as low as 1.8 percent.
Despite political demagoguery about "tax cuts for the rich," in human terms
the rich have less at stake than working people. Precisely because the rich have
so many ways of avoiding taxes, a high tax rate is likely to do them far less
harm than it does to the economy, on which millions of people depend for jobs.
