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Obama’s Tax Hikes to Soak-the-Rich Won’t Work

The Wall Street Journal          APRIL 14, 2011          By ALAN REYNOLDS
Income tax revenues have been remarkably stable at 8% of GDP,

regardless of tax rates.

 The way to increase revenue is to grow the economy.

President Obama’s response to congressional efforts to curb runaway federal spending is to emphasize, once again, his resolve to greatly increase tax rates on married couples whose joint incomes are above $250,000. This insistent desire to raise taxes—which he repeated in a speech yesterday while complaining about “trillions of dollars in . . . tax cuts that went to every millionaire and billionaire in the country”—is a distraction. It won’t solve our nation’s fiscal problem.
Preliminary estimates from the Congressional Budget Office (CBO) project that federal spending under the president’s 2012 budget plan would average 23.3% over the coming decade—up from 19.7% in 2007 and 18.2% in 2001.

Even if the president could persuade Congress to enact all of his proposed tax increases, in addition to surtaxes already included in ObamaCare, the CBO finds we would still face endless budget deficits averaging 4.8% of GDP.

“Federal debt held by the public would double under the President’s budget,” says the CBO, “growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021, adding $9.5 trillion to the nation’s debt from 2012 to 2021.”

And yet, enormous as they are, these deficit and debt estimates assume that the higher tax rates called for under the president’s 2012 budget plan do no harm to the economy, that interest rates stay unusually low, and that the economy avoids recession for a dozen years. Those assumptions require taxpayers to behave much differently than they ever have before.

The revenue estimates are even more unbelievable. According to the Office of Management and Budget, total revenues would supposedly exceed 19% of GDP after 2015, rising to 20% by 2021—a level briefly reached only at the height of World War II (1944-45) and the pinnacle of the tech-stock boom (2000). Moreover, these unprecedented revenues would supposedly come from the individual income tax, which is even less plausible.

It is not as though we have never tried high tax rates before. From 1951 to 1963, the lowest tax rate was 20% to 22% and the highest was 91% to 92%. The top capital gains tax rate approached 40% in 1976-77. Aside from cyclical swings, however, the ratio of individual income tax receipts to GDP has always remained about 8% of GDP.

The individual income tax brought in 7.8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92%, 8% of GDP from 1993 to 1996 when the top tax rate was 39.6%, and 8.1% from 1988 to 1990 when the highest individual income tax rate was 28%. Mr. Obama’s hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed.

Federal revenue from the individual income tax exceeded 9% of GDP only eight times in U.S. history—during World War II (9.4% in 1944), the recessions of 1969-70, 1981-82 and 1991-92, and the tech-stock boom-bust of 1998-2001. Revenues were a high share of GDP during the three recessions because GDP fell.

The situation of 1997-2000 was unique. Individual income tax revenues reached an unprecedented 9.6% of GDP from 1997 to 2000 for reasons quite unlikely to be repeated. An astonishing quintupling of Nasdaq stock prices coincided with an extraordinary proliferation of stock options, which the Federal Reserve’s Survey of Consumer Finances found were granted to 11% of U.S. families by 2001, and with a reduction in the capital gains tax to 20% from 28%, which encouraged much greater realization of taxable gains through stock sales. Revenues from the capital gains tax rose to 10.8% of all individual income tax receipts in 1997 and 13% by 2000. The unexpected revenue windfalls in President Bill Clinton’s second term were largely a consequence of lower tax rates on capital gains.

Using IRS data, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley have estimated that realized capital gains accounted for just 13%-22% of reported income among the top 1% of taxpayers from 1988 to 2006, when gains were taxed at 28%—but that fraction swiftly reached 29%-32% in 1998-2000, when the capital gains tax fell to 20%.

The average tax rate of such top taxpayers was mechanically diluted by the greatly increased realizations of capital gains after 1997 and 2003, since a larger share of reported income consisted of capital gains. Yet the amount of taxes paid by top taxpayers reached record highs for the same reason—there was more revenue to be had from taxing many gains at a low rate than from taxing fewer gains a high rate. Nobody can be forced to sell assets in taxable accounts. To complain that a low tax on realized capital gains is “unfair” is to suggest it would be fairer for affluent investors to sit on unrealized gains, as though an unpaid tax is morally superior to one that collects billions.

As a result of the conventional confusion between tax rates and revenues, some stories in the media have abetted the delusion that the huge gap between spending and likely revenues could be narrowed by simply increasing the highest tax rates on capital gains and/or dividends.

A recent cover story in Bloomberg Businessweek by Jesse Drucker, “The More You Make, the Less You Pay,” reported that, “For the well-off, this could be the best tax day since the early 1930s. . . . For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30% in 1995 to just under 17% in 2007, according to the IRS.”

Among the top 400 taxpayers (rarely the same people from one year to the next), the average tax rate fell to 22.3% in 2000, when the capital gains tax was 20%, from 29.9% in 1995 when the capital gains tax was 28%. But that same IRS report also shows that real tax revenues from the top 400 more than doubled after the capital gains tax fell, rising to $11.8 billion in 2000 from $5.2 billion in 1995, measured in 1990 dollars.

The same thing happened after 2003, when the capital gains tax was further reduced to 15%. The average tax rate of the top 400 fell to 16.6% in 2007 from 22.9% in 2002. Even though there was no stock market boom as in 1997-2000, real revenues of the top 400 nevertheless doubled again—to $14.5 billion in 2007 from $6.9 billion in 2002. Instead of paying less when the capital gains tax rate went down in 1997 and 2003, the top 400 instead paid much, much more.

The trendy talking point of blaming projected deficits on “tax cuts for the rich” is flatly absurd.

Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP—8% and 18%, respectively— regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP.

Mr. Reynolds is a senior fellow with the Cato Institute and the author of “Income and Wealth” (Greenwood Press 2006).

Why Koch Industries Is Speaking Out

Your Declaration of Independence from Obama and Pelosi

Do you remember the Contract with America? Millions of Americans came together to demand action from Washington on issues ranging from abortion and gun rights to out of control spending and regulation. And we won. Conservative candidates swept the polls and held back Washington’s power grabs, waste and self-indulgence for almost a decade. That was 16 years ago. Since then, politicians have abandoned America. Election after election, we see the same results. Incumbents get comfortable, outsiders become insiders, and before we know it… everything we worked for vanishes in the haze of bloated budgets, waves of illegal immigration, and outbursts of federal power. It’s time for a new Contract. We have gathered the 10 most important conservative issues into a list that we demand action and adherence to

Declaration of Independence
We, the undersigned American voters, are disgusted with the antagonism of many of our elected and appointed government officials toward American values, their violations of their oaths to uphold our Constitution, and their manifest disdain for our God-given, constitutional rights and liberty. The words and deeds which have come from such an attitude have made our federal government the most serious threat to the safety and freedom of Americans in our time.
You, our elected and/or appointed officials, are our representatives. Your authority over us is not unlimited: it is limited by our fundamental law, our Constitution. We expect you to uphold, not subvert, our fundamental values. We expect you to abide by your oath to support our Constitution. If you represent us, you should publicly support—in action as well as in speech—at least the following American principles:

Article I: Limited Government
The federal government has been given clearly limited and defined powers in the Constitution in order to preserve our freedom. The idea of Big Government running every aspect of our lives—from healthcare to the cars we drive—is revolting and unconstitutional. The founding fathers designed separation of powers with checks and balances into the Constitution to decentralize power and preserve our liberty. A constitutional amendment requiring term limits for all publically elected officials is necessary. Presidents, congressmen, senators, and judges who violate the Constitution’s limit on the powers of their offices—and do not work to prevent other officials’ transgressions of those limits—must be removed from office.

Article II: Gun Rights
The Second Amendment guarantees private citizens the right to keep and bear arms. The federal government has no authority to restrict this right in any way, shape, or form. Federal officials who do so must be removed from office.

Article III: Courts
Judges should interpret the law by studying the intentions of the framers of the Constitution and its amendments, and by adhering to legal precedents which are based squarely on those intentions. Judges who legislate—or amend our Constitution—from the bench must be removed from the bench.

Article IV: Federal Spending
Unconstitutional legislation and fiscal irresponsibility have produced out-of-control deficit spending that is crippling our future—and our children’s and grandchildren’s. The only way to bring Congress under control is to restrict how much they can tax and spend and one way to accomplish this is through a balanced budget amendment. Legislators and presidents who engage in uncontrolled spending must be removed from office.

Article V: Energy
Americans should be free to pursue energy options which use our own resources, don’t tax us to subsidize politically-favored groups, and don’t enslave us to foreign countries. We need sensible, constitutional environmental rules—not environmentalist extremism—the removal of impediments to the development of nuclear and other forms of energy, and freedom to drill in Anwar and elsewhere. Politicians who stand in the way of energy independence must be removed from office.

Article VI: Personal Responsibility
Government handouts in any form take from some to give to others and create dependence. Government does not exist to provide for its citizens and our Constitution does not authorize such legalized theft. Current federal compensation programs, including “corporate welfare”, should be phased out—and politicians who advocate such things should be removed from office.

Article VII: National Defense

A strong national defense is a constitutional as well as a practical necessity in this hostile world. Our citizens and our national interests must be protected. Terrorists should be tried in military tribunals and not given the rights of American citizens that so many of our troops have died to defend. Our military forces must be kept second-to-none: by a large margin. Politicians and officials who weaken our national defenses must be removed from office.

Article VIII: Borders
Secure borders are essential to the defense of our lives, liberty, and property. There is a legal way to come to this country and we welcome those who do so. Those who do not are breaking the law and should be treated as criminals. Amnesty is not an option for those who came here illegally. Politicians who advocate anything less must be removed from office.

Article IX: Right to Life
Human life unquestionably begins at conception. Ending the life of an unborn child via abortion is murder, is truly unconstitutional, and must be outlawed. Politicians whose character does not agree with this must be removed from office.

Article X: States Rights
The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The federal government has usurped many powers from the state governments. These powers must be returned to the respective states—for the sake of constitutionality and of our freedom. Politicians who oppose states’ rights must be removed from office.

CONCLUSION:
We the people of these United States declare that we will support candidates who support these principles and work against those who violate them.

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