Bush Tax Cuts and Federal Revenues |
An increase in tax rates on the rich, or
anyone else, does not always lead to increased government revenues.
Historically, almost the opposite has occurred. Over 50 years ago, President
Kennedy lowered tax rates and Federal revenues grew dramatically. President
Reagan did the same thing with the same result when he took office.
Even the much-maligned Bush tax cuts did
not reduce Federal revenues. In 2002 the Federal government collected 1
Trillion dollars in income taxes and 1.88 Trillion in total revenues. By 2007
after five years of Bush “tax cuts”, Federal income tax collections went up by
50% to over 1.5 Trillion dollars, and total government receipts exceeded 2.5
Trillion. In 2007 the total federal deficit was a mere 160 Billion dollars, the
same it had been in 2002. Only with the recession did income tax revenues go
down to 2002 levels although total government receipts stayed higher.
Today, total Federal government revenues
are the highest they have ever been. Unfortunately, in the last five years massive
government spending has far outstripped the increased revenues produced by the
Bush cuts. Even if the President were to tax those making over $250000 at a
rate of 100%, it would not come close to dealing with the massive debt roll
accumulated during his previous four years in office.
Ironically for conservatives, it would
appear that reductions in tax rates lead to increased government revenues and
only enable more government spending. At the same time, it would appear that
raising tax rates would actually lead to less revenue for Washington? Why
should this be so?
In the last election campaign Governor
Romney tried to make the point that lower tax rates would actually grow the
economy and produce greater revenues for the Federal government. Most people,
including those who should know like politicians and newspaper editors, could
not understand the concept.
But there is another factor. Increasing
tax rates only increases tax avoidance strategies both legal and illegal.
Recently, a noted political commentator suggested a national lottery where
people would be entered in the drawing for the huge payout if they would only
submit their tax returns to audit. He estimated that 2 Trillion dollars of
income goes unreported every year. His scheme is a crazy one but it illustrates
the insanity of our whole tax system.
Increasing tax rates on the rich or
anyone else will only encourage more tax avoidance since the potential reward
gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the
potential reward for deferring, sheltering, or otherwise hiding income has
doubled.
How many contractors do you know who
prefer to receive payments in cash? How many people do you know who receive
unemployment benefits, but who at the same time work “under-the–table”
somewhere? If people in such negligible tax brackets risk breaking the law for
such a small return, what do you suppose the prosperous will do?
For example, you can raise the tax rate
on capital gains, but people will only pay the tax when they finally sell the
asset that has increased in value. If the government raises the tax rate on
dividends, corporations will just reduce or even eliminate their dividends.
Investors will also cut back or even sell their positions in dividend paying
stocks in anticipation of an increase in tax rates. I’m not making this up.
Just recently, Costco announced a record $7 per share dividend before the end
of this tax year. The company is headed by one of President Obama’s major
supporters in the last election.
Inevitably, increases in tax rates never
produce the expected tax revenues. Just look at the state of Connecticut. Two
years ago newly elected Governor, Dannell Malloy, and an overwhelmingly
Democrat legislature pushed through the largest tax increase in State history.
Now, the expected revenues have failed to materialize, and the Governor’s
hapless aides can only blame the failure of the economy to grow over the past
two years. ###
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