There is a difference between raising
tax rates and raising taxes. 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 a similar result after 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, during the Obama administration
massive government spending far outstripped the increased revenues. Even if Congress
was 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 the Obama
administration’s 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?
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, cannot
understand the concept.
But there is another factor. Increasing
tax rates only increases tax avoidance strategies both legal and illegal. 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.
No one has ever asked Hillary Clinton or
her husband why they felt a need to set up the tax exempt Clinton Foundation
for their charitable work in the first place. Many financial planners advise
high-end clients to set up foundations for tax purposes. We all know of the
Gates foundation and the Buffett foundation. Theoretically, since these
foundations pay no taxes, more of their money can be used for the charities
they wish to support.
Even assuming that these people had the best
of motives, they must have realized that they could achieve greater results
with their money than the Federal government could. Why give the government a
third or more of your speaking fees when all the fees could go to the
Foundation. Of course, they also could be able to maintain control over the tax
exempt funds as opposed to leaving it to government bureaucrats to decide. The
funds could go to pet causes.
These foundations also help the ultra-rich
to avoid dreaded estate or death taxes. Recently multi-billionaire liberal
activist George Soros has transferred about 18 Billion dollars to his own
foundation. He will eventually die but no death taxes will be paid since his
foundation will live on. When I worked as a financial planner, it was common to
refer to the estate tax as a “voluntary” tax, a tax only paid by those too lazy
or stupid to take measures to avoid or minimize it. Actually, the estate tax
accounts for a very small share of federal revenue since estates under $5
Million are exempt from taxation.
There are other legitimate ways for
people to shelter income from taxation. For example, taxable withdrawals from
IRAs and other retirement plans can be deferred until age 70, and after that
only minimum withdrawals need be taken over one’s lifetime. Raising tax rates
only discourages taking money out of IRAs. Lowering tax rates would actually
increase taxable withdrawals from IRAs and 401k type plans.
President Trump is also right about
lowering the Corporate tax rate. Corporations actually don’t pay taxes. The
taxes are figured into the price of what their customers pay in the same way
that the real estate taxes paid by landlords come out of the rent paid by
tenants. Higher corporate taxes are inevitably passed on to the consumer.
Also, corporate accountants are paid to
find ways to create strategies that will minimize corporate tax liability. A
higher tax rate will inevitably lead to more and more drastic measures. When
states raise corporate tax rates, corporations move to more tax friendly states
as General Electric did in Connecticut. We all know that the high Federal
Corporate tax rate has led many domestic companies to relocate overseas.
Inevitably, increases in tax rates never
produce the expected tax revenues. Just look at the state of Connecticut. Two
years after his election Democrat Governor Dannell Malloy, and an
overwhelmingly Democrat legislature pushed through the largest tax increase in
State history. The expected revenues failed to materialize, and the Governor
had to raise taxes again to balance his budget. After this second Malloy tax
increase, Connecticut is still billions in debt. No wonder the Governor has
declined to run again.
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