by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Let’s say you buy the notion — popular among many left-of-center commentators — that the rich don’t pay their fair share of taxes. How would you go about fixing the situation? By raising tax rates on the top income earners, of course!
At first glance, the tax rate issue seems inseparable from the tax fairness issue, since higher taxes are expected to shift society’s wealth from the private sector to the public sector, where, broadly speaking, it is redistributed to lower-wage earners and the needy. In reality, the people at the bottom of the scale have benefited directly and indirectly from every tax rate reduction dating back to Kennedy’s rate reductions in the early 1960s and through the tax cuts adopted early in the administration of George W. Bush. If those lower rates, along with the Alternative Minimum Tax fix, are allowed to expire, the poor will be burdened even more than the wealthy because the whole economic pie will shrink.
If tax cuts work to expand the economy, the income pie gets larger for everyone. For example, tax rate reductions on businesses may mean more money after-tax for hiring more workers, paying them more, or purchasing more plant and equipment and computers that make workers more productive and efficient. Tax rate reductions on investment expand investment and mean more funds available for new businesses to get off the ground and for existing businesses to expand. Lower estate taxes may mean that family-owned businesses don’t have to be sold at auction at the time of the owner’s death. Everyone benefits.
But … but … to become fairer, you say, the tax code needs to tax the rich more heavily.
President Obama certainly thinks so. His latest budget proposal raises $1,700 billion in taxes over the next decade by increasing tax rates for the wealthiest Americans as well as for the middle class. He wants a top tax rate of almost 42 percent (up from 35 percent today) on anyone with more than $250,000 in income from salaries, small-business income, and dividends. After paying state and local taxes, some Americans will face tax rates of nearly 50 percent—because for businesspeople and other active participants in the economy, many other types of tax are applied to almost every stage of transactions. As a result, much of those people’s wealth, which might otherwise go toward creating jobs, would end up sitting in unproductive tax shelters.
For this and other reasons, high tax rates are the worst way to redistribute income to the poor and the middle class. In 1972, when the highest tax rate on the rich was 70 percent and the top capital-gains tax rate was 35 percent, the richest 1 percent of Americans assumed 18 percent of the income-tax burden. Today, with a top income-tax rate of 35 percent and a capital-gains rate of 15 percent, their share is 39 percent, more than twice as much. This is true because, faced with high tax rates, the rich of 40 years ago put more of their income into tax shelters or foreign countries. They invested less, and they worked less. And the rest of us suffered during the years of stagflation—as we will again, if rates are raised.
Even though taxes are 10 to 20 percent lower in the United States than they are in most other industrialized nations, the U.S. government is more dependent on rich people for taxes than are many of the more socialized economies of Europe. According to the Tax Foundation, the U.S. gets 45 percent of its total federal taxes from the top 10 percent of tax filers, whereas the average for industrialized nations is 32 percent. America’s well-off bear a larger share of the tax burden than do the rich in Belgium (25 percent), Germany (31 percent), France (28 percent), and Sweden (27 percent).
Are all those numbers hurting your head? Why not check out the chart below.