Thursday, April 14, 2011

Liberal Media Advocates Won't Report That Raising Tax Rates Reduces Tax Revenue

The liberal advocates in the mainstream media are cheerleading for President Barack Obama’s call yesterday to raise tax rates on the rich so that senior citizens don’t go without health care, and the poor don’t go without food.

What the media won’t tell you is the truth about tax rates, and that is raising tax rates will actually produce less revenue for the government social welfare program.

Class warfare has been a staple of the Democratic Party playbook for as long as I’ve been alive.  Soak the rich because they have too much money anyway, and redistribute that wealth to people who have not been lucky in life.  You see, the Democratic Party appears to operate under a premise that successful people have somehow benefited from some mythological good fortune that was denied others.  I see no overwhelming evidence of that, but many liberals in the Democratic Party really believe that mantra.

I believe that most successful people prepare better, work harder and endure failure better than unsuccessful people.  Of course, there are always exceptions to the rule, and there are truly people who have found themselves in difficult positions through no fault of their own.  Those are the people that the government welfare programs are designed to help.

Unfortunately for those programs that need funding to aid the disadvantaged, raising taxes on the rich is likely to reduce revenues for these efforts.  History has shown that every time tax rates are raised, revenue to the federal government decreases in the long run. High marginal tax rates on the richest Americans changes their behavior.  They don’t work as hard; they don’t invest as much money; and they defer income or evade taxes altogether through intricate tax shelters.

In the late 1970s, I knew of a professional athlete in Chicago who signed a long-term contact with his team for big money. Because of the high confiscatory tax rates at the time (70 percent for every dollar earned over $250,000), this athlete had the payment on his contract deferred, so he would never be paid more than $250,000 a year.  However, the deferred payment meant that his team would be paying him long past the year 2000.  I don’t know if that athlete ever renegotiated the terms of the contract after Ronald Reagan drastically reduced the top marginal tax rate.

The way the rich change their behavior to avoid higher tax rates ultimately leads to a slowdown in the economy, and so the nation’s economic pie becomes smaller.  What would you liberals in the media rather have….rich people paying a larger percentage of a small pie, or a smaller percentage of a very large pie?  If you want to increase revenue to the government to save your social welfare programs, you should be cheerleading for reduced tax rates.

A good example of the benefits of reduced tax rates occurred during the administration of President Ronald Reagan.  During the 1980s, Reagan reduced marginal tax rates on the rich from 70 percent to 50 percent and then to 28 percent.  As I previously noted, and many of you too young to remember might find it hard to believe,  there was a time in this country that every dollar earned over $250,000 was taxed at 70 percent.  Talk about penalizing success!

Although Reagan dramatically reduced the top marginal rate for the rich, tax revenues increased significantly.  Individual income tax revenue rose from $244 billion in 1980, the last year of the Carter Administration, to $446 billion in 1989, just as the Reagan Administration was ending.  In other words, tax revenue almost doubled.  That fact seems to contradict the class warfare rhetoric of the Democratic Party…doesn’t it?

President George W. Bush was often pilloried for favoring the rich with his tax cut plan, which was ultimately enacted by Congress.  However, the top income earners actually saw their share of taxes paid rise at a faster rate than they did under the Clinton tax hikes of the previous decade. The reason is simple. It was more attractive for the rich to invest in tax-generating investments under the lower rates.  In fact, during Bush’s second term, the federal treasury experienced its highest receipt of income tax revenue in history.

From a political standpoint, I can understand the attractiveness of trying to demonize and vilify very rich, successful people. It estimated that about only two percent of the American population makes $250,000 or more. So what if you alienate them with class warfare rhetoric?  You can still work on the other 98 percent of the population to fashion an electoral majority. 

Maybe the Democratic Party truly believes that raising taxes on the rich is a winning political strategy, but it makes no sense economically.  Ultimately, the people the liberals claim they want to help will lose because higher tax rates will produce less revenue to redistribute.

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