Thoughts on the Tax Rate Debate

December 13, 2010

As the expiration of the Bush Era Tax Cuts looms and Congress debates what to do next, it is perhaps useful to revisit the facts, and some basic understanding of what they mean.

Let’s first establish the fact that the current issue is not one of tax CUTS. We’re talking about existing tax rates that have been in force for a decade. No one is talking about cutting taxes for the rich. The issue is whether to allow automatic tax increases to take place… and whether to shield anyone or everyone from these automatic increases. If these Obama Tax Increases take place, they will represent the largest tax hike in American History!

Conservatives take the position that it is unwise and unproductive (not to mention unfair) to raise taxes on anyone at all during a period of economic turmoil such as we are currently experiencing. Further, it would do damage to the employment prospects of the working classes if more of the income of those in a position to create jobs were to be confiscated in taxes!

Liberals take the position that only the so-called “middle class” deserves to have their tax rates preserved, and that the “rich” (defined as those earning over $250K annually) aren’t paying their fair share and should have their taxes raised.

Before going into the dry economic realities that are embodied in these diametrically opposed positions represent, let me first share a parable which has made the circuit of viral email. It very clearly and accurately portrays our “progressive” tax system in a way even a Liberal steeped in Academia and Leftist Propaganda can understand it.

Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

 The first four men — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man — the richest — would pay $59.

 That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).

 "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.

 The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

 The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same proportion, and he proceeded to work out the amounts each should pay.

 And so the fifth man now paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.

 But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man who pointed to the tenth. "But he got $7!"

 "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too . . . It's unfair that he got seven times more than me!"

 "That's true!" shouted the seventh man, "why should he get $7 back when I got only $2? The wealthy get all the breaks!"

 "Wait a minute," yelled the first four men in unison, "We didn't get anything at all. The system exploits the poor!"

 The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were $52.00 short of paying the bill! Imagine that!

 And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Monaco and the Caribbean.

 Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!

Given the fact that 40% of American wage earners pay NO income tax, and in fact, some receive back money in credits that exceed any withholding contribution, we can see that the progressive tax structure already soaks the rich and executes a form of wealth redistribution!

Given the fact that the top 1% of wage earners pays almost 30% of the tax bill, and the top 10% pays nearly 60%... how can anyone argue they don’t pay their “fair share?”

Class warfare is simply jealousy combined with the Democrat fostered myth that the economy is a Zero Sum Game. For someone to have more, someone else must get less. This is patently untrue, but the myth feeds the narrative.

The other myth Democrats propagate is that tax rates are directly proportional to revenues. This has been disproven every time tax cuts have been tried! Tax rates affect economic activity. lowering tax rates spurs economic growth, and results in an increase in tax revenues. Kennedy proved this. Reagan proved this. Bush proved this. It happens every time it’s tried. Deficits are never a function of revenues; they are a function of spending. Under Reagan, tax cuts doubled revenues, yet the deficit went up because the Democrat-controlled Congress spent $1.84 in new spending for every $1 of new revenues!

It is essential to remember that it is the very populace the Democrats seek to slap with punishing tax increases that are the engine behind hiring and job creation. Whether the $250K+ person is a business owner, who will hold off expansion and hiring, or whether (s)he simply won’t hire a maid or buy a luxury item that wage-earners work to produce… jobs are dependent on the wealthy!

Let me give you a real-world example of how taxing the “rich” hurts the middle class:

During the 80s there was a “soak the rich” sentiment that resulted in a luxury tax being levied upon “yachts” – pleasure boats of a certain size that lawmakers deemed out of the reach of the middle class, and a conspicuous luxury “toy” of the hated rich.

The class warriors were pleased when this tax was passed. The “rich” would be punished for their extravagance.

But what happened?

The “rich” found other toys for their distractions. Instead of paying the higher taxes for their yachts, they stopped buying yachts.

Boat makers laid workers off. Marinas let workers go. Boat Sellers closed up shop. Boat repair shops lost business. Restaurants near marinas lost business. Once thriving communities, whose economic well being depended on the commerce generated by the yachting populace were all negatively impacted.

Oh, and there was also little in the way of additional tax revenue generated by the tax, as so few yachts actually sold!

Who wasn’t hurt? The rich! They simply found other ways to spend their money!

But those who were hurt complained, loudly, to Congress. The result? That failure of a Luxury Yacht Tax was repealed!

Congress must begin to understand that the power to tax is not given them to control people or to redistribute wealth. The constitutional power to tax is only to raise revenue for the legitimate expenditures on the legitimate activities of the Federal Government. And if it isn’t in Article II of the Constitution – it isn’t a legitimate activity!

Raising taxes ANY time is a bad idea. It does not enhance revenue. It puts an ankle weight on those who are the runners in our economy. But raising taxes on the engine of job creation during what could be argued as the worst economy since the Great Depression is suicidal.

Copyright ©2010 Doug Edelman