Tuesday, May 17, 2011

On Phony Talk About Tax Rates

Thomas Sowell nails it:
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....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.
Bottom line: The elite rich will never have high taxes, and talk otherwise is nonsense. When a politician, Obama or Boehner talks about a change to the tax code to bring about "fundamental change", I say leave the tax code exactly where it is and start lowering rates from here.


  1. Question:

    What income level would need to be chosen, above which there would be a marginal income tax rate of 100%, in order to close the budget deficit this year / next year?

  2. One cannot make a meaningful comparison of the rates under the tax code before TRA-86 and after. They are like comparing apples and oranges. The '53 tax code was littered with loop holes and credits that allowed anyone with a good accountant and money in the bank to lower their tax rate far below even Reagan's highest rate of 28% on ordinary income. Back then our firm made a living setting up perfectly legal 20 to 1 tax shelters. Today its impossible to utilize a scheme like that thanks to the passive activity loss rules, so the best you can hope for is a 1 to 1 tax shelter (ie a deduction) which obviously shelters very little income. The people that got hit with those super high tax rates were very few and most likely ordinary income workers (ie people employed by a business).

    What else is overlooked is that there was a fair amount of tax fraud that was perpetrated by across the board. It was easy to get away with becuase things like 1099s and electronic record keeping didn't exist.

    Back then if you wanted to cheat on your taxes the easiest way was to create a business and then convert personal expenses into business expenses. This wasn't viewed as fraud by the general population, it was viewed as good tax planning. In fact, many corps often provided the use of corporate cars, jets, houses and huge expense accounts to their top level employees. None of that was taxable. Today if you ride on a private jet with no business purpose, you will receive a 1099 or have the value of the flight added to your w-2.

    My point is, as we move beyond the 40% tax rate (which we will with Obama care tax and faze out of bush tax cuts), we are heading into uncharted waters. In all the previous tax codes where the rates were very high, there were lots of ways for people to escape from being taxed at those high rates. Under this tax code and with the IRS's electronic auditing capabilities, a 70% tax would be 70%. To beleive that people will just accept it is naive. What they will do is anyone's guess.

  3. ALL AMERICANS WILL either pay higher taxes AND the government will make deep across-the-board spending cuts, OR America will no longer exist. There are no other options.