Wednesday, August 22, 2012
“It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates…. [A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.” —John F. Kennedy, 1963
Even if most policymakers and members of the public instinctively understand the wisdom of President Kennedy’s words, tax rates are set to go way up, not down, next year because of the scheduled expiration of the Bush tax cuts at the beginning of 2013. The Obamacare law also raises tax rates on wealthy individuals by an additional 3.8 percentage points next year. President Obama and others in Congress argue that these higher tax rates are justified because of the growing consensus that the rich don’t pay their fair share of taxes. Unless we do something to spread the burden more equitably, the argument goes, American society will become more unfair and the economy more unsustainable with each passing year.
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. ...
Below are a series of statements reflecting popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness. We’ll address these statements (and debunk attendant myths) one at a time.
1. To become fairer, the tax code needs to tax the rich more heavily.
2. The rich are paying less in income taxes than they have in the past 50 years.
3. When all the other taxes are counted, the rich get off easy.
4. Tax cuts are just Robin Hood in reverse, taking from the poor to give to the rich.
5. Lower tax rates can make the tax burden fairer.
6. All those tax cuts created deficits that have mortgaged our children’s future.
7. Ordinary Americans pay more than their fair share of taxes.
8. The 15 percent tax on investment income, which is well below the income-tax rate that most salaried workers pay, is a gift to the wealthy.
9. A higher capital-gains rate would just level the playing field.
10. The "wealthy" are likely to be the people next door.
11. It is increasingly harder to climb the economic ladder, and changing the tax code will help.