Tag Archives: Taxes

IBD Editorial: Obama’s Big Lie On Taxes

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A large and ongoing problem with our public discourse is the dishonesty and disinformation foisted on an unsuspecting public. That’s certainly the case when it comes to taxes.

Sometimes, politicians claim things that just make you turn your head and say, “huh?” That’s what happened last Sunday when President Obama, in a pre-Super Bowl interview with Fox TV’s Bill O’Reilly, said the following:

“I didn’t raise taxes once. I lowered taxes over the last two years. I lowered taxes for the last two years.”

It was a great quote, very dramatic and emphatic. It was also quite wrong. Tax watchdog groups and think tanks have looked at the record and found just the opposite — that Obama has raised taxes numerous times, and that taxes did in fact rise during the first two years of his presidency.

Indeed, in 2009 one of the first things Obama did after entering office was to slap a 156% increase in the federal tax on tobacco — about 62 cents a pack — to pay for the children’s health insurance program.

Whether you think this is a good idea or not, it is a tax.

Please recall the president’s solemn promise in the 2008 campaign that families earning less than $250,000 a year wouldn’t see “any form of tax increase.” As Americans for Tax Reform (ATR) noted, the median income of smokers is “just over $36,000.”

But the granddaddy of them all was the health care bill that the president signed into law last March.

ObamaCare, the Heritage Foundation calculates, “contains 18 separate tax increases that will cost taxpayers $503 billion between 2010 and 2019.” And at least seven of those tax hikes are clear violations of the president’s vow not to raise taxes on the middle class.

So the president not only raised taxes more than once, he raised them massively to help fund his unpopular takeover of health care.

In further assessing Obama’s tax record, one also must look at intent. The White House and Democrats in Congress had explored the possibility of letting all the Bush tax cuts expire last year, which would have been a huge tax hike on all Americans.

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Reaganomics: What We Learned

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From today’s Wall Street Journal:

By ARTHUR B. LAFFER

For 16 years prior to Ronald Reagan’s presidency, the U.S. economy was in a tailspin—a result of bipartisan ignorance that resulted in tax increases, dollar devaluations, wage and price controls, minimum-wage hikes, misguided spending, pandering to unions, protectionist measures and other policy mistakes.

In the late 1970s and early ’80s, 10-year bond yields and inflation both were in the low double digits. The “misery index”—the sum of consumer price inflation plus the unemployment rate—peaked at well over 20%. The real value of the S&P 500 stock price index had declined at an average annual rate of 6% from early 1966 to August 1982.

For anyone old enough today, memories of the Arab oil embargo and price shocks—followed by price controls and rationing and long lines at gas stations—are traumatic. The U.S. share of world output was on a steady course downward.

Then Reagan entered center stage. His first tax bill was enacted in August 1981. It included a sweeping cut in marginal income tax rates, reducing the top rate to 50% from 70% and the lowest rate to 11% from 14%. The House vote was 238 to 195, with 48 Democrats on the winning side and only one Republican with the losers. The Senate vote was 89 to 11, with 37 Democrats voting aye and only one Republican voting nay. Reaganomics had officially begun.

President Reagan was not alone in changing America’s domestic economic agenda. Federal Reserve Chairman Paul Volcker, first appointed by Jimmy Carter, deserves enormous credit for bringing inflation down to 3.2% in 1983 from 13.5% in 1981 with a tight-money policy. There were other heroes of the tax-cutting movement, such as Wisconsin Republican Rep. Bill Steiger and Wyoming Republican Sen. Clifford Hansen, the two main sponsors of an important capital gains tax cut in 1978.
What the Reagan Revolution did was to move America toward lower, flatter tax rates, sound money, freer trade and less regulation. The key to Reaganomics was to change people’s behavior with respect to working, investing and producing. To do this, personal income tax rates not only decreased significantly, but they were also indexed for inflation in 1985. The highest tax rate on “unearned” (i.e., non-wage) income dropped to 28% from 70%. The corporate tax rate also fell to 34% from 46%. And tax brackets were pushed out, so that taxpayers wouldn’t cross the threshold until their incomes were far higher.

Changing tax rates changed behavior, and changed behavior affected tax revenues. Reagan understood that lowering tax rates led to static revenue losses. But he also understood that lowering tax rates also increased taxable income, whether by increasing output or by causing less use of tax shelters and less cheating on taxes.

Moreover, Reagan knew from personal experience in making movies that once he was in the highest tax bracket, he’d stop making movies for the rest of the year. In other words, a lower tax rate could increase revenues. And so it was with his tax cuts. The highest 1% of income earners paid more in taxes as a share of GDP in 1988 at lower tax rates than they had in 1980 at higher tax rates. To Reagan, what’s been called the “Laffer Curve” (a concept that originated centuries ago and which I had been using without the name in my classes at the University of Chicago) was pure common sense.

There was also, in Reagan’s first year, his response to an illegal strike by federal air traffic controllers. The president fired and replaced them with military personnel until permanent replacements could be found. Given union power in the economy, this was a dramatic act—especially considering the well-known fact that the air traffic controllers union, Patco, had backed Reagan in the 1980 presidential election.

On the regulatory front, the number of pages in the Federal Register dropped to less than 48,000 in 1986 from over 80,000 in 1980. With no increase in the minimum wage over his full eight years in office, the negative impact of this price floor on employment was lessened.

And, of course, there was the decontrol of oil markets. Price controls at gas stations were lifted in January 1981, as were well-head price controls for domestic oil producers. Domestic output increased and prices fell. President Carter’s excess profits tax on oil companies was repealed in 1988.

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Canada: Another Tax Cut Success Story

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According to Neil Reynolds of the Globe & Mail “when it comes to setting corporate tax rates, you get to choose between expansive revenue with lower rates or restrained revenue with higher rates.”

Canada’s Conservative Finance Minister, Jim Flaherty, has brought his country’s corporate tax rate down from 21% to 16.5% over the past six years, with a final cut scheduled, bringing the rate down to 15%. With the rhetoric on the Left about “corporate giveaways,” you would not be blamed for thinking that Minister Flahrety’s rate reductions were an irresponsible reduction of government revenues, especially during a recession.

The facts paint a very different story. Corporate tax revenues are higher today than when Minister Flaherty began slashing rates. In 2002, with the old rates intact, revenue from corporate taxes was $24.2 billion; 2003, $22.2 billion; 2004, $27.4 billion; 2005, $29.9 billion. In 2010 corporate tax revenues were $30.3 billion, equaling the average of the past nine years. Additionally, corporate tax revenues provided 13.9% of government income in 2010, compared to the past decade’s average of 12.6%.

This should not come as a surprise. The argument over tax rates and tax revenues has been settled. To a point, lower tax rates result in higher revenues, whereas higher rates result in lower revenues. The static modeling used by many economists is premised upon “ceteris paribus” – with all other things being equal. Static modeling is constantly used to justify claims that tax rate reductions will result in lower government revenues. In reality, all other things are never equal.

In a dynamic economy, all events are interrelated, and changes in one secotr can, and usually do, effect all other sectors. Therefore, when tax rates are raised the government consumes capital that could have been invested in a business that could create more jobs. A more profitable business, with higher earnings and more employees results in larger tax revenues. Additionally, lower tax rates act as a disincentive to sheltering capital. When tax rates are lower, people conclude that it is more sensible to invest in a thriving economy, increase their capital, and thus pay more in taxes. Conversely, when tax rates are increased, less money is spent in the private sector, money becomes idle, and tax revenues decrease.

The evidence of the success of tax cuts is overwhelming. The numbers on income taxes are irrefutable. From a research paper I wrote on the flat tax:

In 1921, before the Harding-Coolidge tax cuts the top income tax rate was over 70% , while government revenue was $700million and the federal government’s real revenue growth rate was -9.2%. Following the tax cuts, the top marginal rate was reduced to 25% , resulting in the government revenue growth rate rising to 0.1% and government revenue to $1.2 billion . In 1961 the top marginal income tax rate was over 90%, while government revenue was $90billion with a revenue growth rate of 2.1%. Following the Kennedy tax cuts, the top marginal rate was reduced to 35%, government revenue boosted to $155 billion and the growth rate had gone up to 9% . In 1980 the top marginal rate was 70%, government revenue was $550 billion with a growth rate of -2.8%. President Reagan cut the top marginal rate to 28%. The result was an increase in government revenue to $1.4 trillion , with the growth of government revenue rate rising 6.4%, up to 3.6%.

Results were similar under President Clinton when capital gains tax rates were reduced. Revenues and the rate of revenue growth increase dramatically when tax rates are cut.

Canada’s reduction of corporate tax rates will attract more business to Canada, which can now boast of having the lowest corporate tax rate in the G7. The corporate tax rate reduction in Canada is yet another tax cut success story.

Strictly Right Radio episode 76

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On this Strictly Right, Ari analyzes the the media and the Left’s reaction to the Arizona shooting, the hypocrisy of the Left on profiling, the success of Canada’s corporate tax cuts, the targeting of Sarah Palin by the left and more.

Listen online:

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Tax Rates v. Tax Revenues and the Tax Compromise of 2010

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The Leftist rallying cry ‘tax cuts for the rich’ is predicated upon intentional distortions. In search of votes, Democrats passionately decry the moral injustice of ‘rich’ people being permitted to keep and accumulate the fruits of their labor. If only taxes were higher, the Left contends, the government would have the necessary funds and power to impose equality on ‘the masses.’

The moral argument for lower taxes is quite simple: people are entitled to retain their private property. Taxes should be used to fund the defined roles of government and nothing else. Social engineering and wealth redistribution to favored constituencies are not what taxes are supposed to be used for.

The economic argument has been proven throughout the course of history. To a point, lower tax rates result in larger revenues for the federal government. Thomas Sowell recently wrote a great article on this topic:

…High tax rates do not necessarily result in high tax revenues to the government. “It is time to face the facts,” he said. Merely having high tax rates on large incomes will not bring in more tax revenues to the treasury, because of “the flight of capital away from taxable investments.”

This was all said in 1924, in Mellon’s book, “Taxation: The People’s Business.” Yet here we are, more than 80 years later, still not facing those facts.

It is not just a question of what Andrew Mellon said. It is a question of hard facts, easily checked in official documents available to all– and ignored all these years.

Internal Revenue Service data show that there were 206 people who reported annual incomes of one million dollars or more in 1916. But, as the tax rate on high incomes skyrocketed under the Woodrow Wilson administration, that number plummeted to just 21 people reporting a million dollars a year in income five years later…

Right after Congress enacted the cuts in tax rates that Mellon had been urging, there were suddenly 207 people reporting taxable incomes of a million dollars or more in 1925. As Casey Stengel used to say, “You could look it up.” It is on page 21 of an Internal Revenue publication titled “Statistics of Income from Returns of Net Income for 1925.”

Where had all the income of those millionaires been hiding? In tax-exempt securities like state and local bonds, among other places. Mellon had urged Congress to end tax exemptions for such securities, even before he got them to cut tax rates. But he succeeded only with the latter, and only after a political struggle with those who made the same kinds of arguments that are still being made today by those who cry out against “tax cuts for the rich.”

…The government, which collected less than $50 million in taxes on capital gains in 1924, suddenly collected well over $100 million in capital gains taxes in 1925. At lower tax rates, it no longer made sense to keep so much invested in tax-exempt securities, when more money could be made by investing in the economy.

As for “the rich”– who really were rich in those days, when $100,000 was worth more than a million dollars is worth today– those in the highest income brackets paid 30 percent of all taxes in 1920 and 65 percent of all taxes by 1929, after “tax cuts for the rich.”

How can that be? Because high tax rates on paper, that many people avoid, often does not bring in as much tax revenue as lower tax rates that more people actually pay, after it is safe to come out of tax shelters and earn higher rates of taxable income.

The investors do this because it makes them better off, on net balance, even after they pay more money in taxes on incomes that have gone up. More important, the economy benefits when there is more investment in things that create more jobs and rising output…

As John Adams said, “facts are stubborn things.” In this case, the facts support lower taxes.

Since 2000, Democrats have railed against the ‘Bush tax cuts for the rich.’ Now Democrats claim that the extension of the Bush tax rates, by a Democrat controlled Congress, and a Democrat president, is a great victory for Obama and his party.

Preventing one of the largest tax rate hikes in history is a victory for the American people and conservative ideas. In no way can an acquiescence by the Left of this magnitude truly be seen as a victory for the Left.

However, reality never seems to get in the way of the political class. In all likelihood, by 2012 President Obama will be touting the success of the ‘Obama tax cuts.’ In 1996 Bill Clinton won reelection by running on all the successes of the Contract with America – the very same document Clinton had called the “Contract on America,” likening conservative ideas to a hit man’s contract. Just like Clinton, Obama will try to claim responsibility for the successes of Republican ideas, which he will fight bitterly against.