Politics & Policy

What Tax Rate Is Fair?

Might Ted Kennedy think a 70 percent tax is too high?

The other day Sen. Ted Kennedy was asked by a reporter why he opposes President Bush’s tax cut when his brother, President John F. Kennedy, advocated an even bigger tax cut forty years ago. Back in 1963, JFK cut income taxes by 30 percent and the economy soared. Now, course, George Bush wants to do something similar. Here was part of Ted’s response to this apparent contradiction: “The tax laws at that time were 90 percent on income. They were effectively confiscatory.” Hold the phones folks! We now have one of the most liberal members of Congress conceding that tax rates above 90 percent are confiscatory. At a 90 percent tax rate, the worker or investor gets to keep 10 cents for every additional dollar earned, and the government snares 90 percent. Yes, we can now all agree, such a policy is confiscation.

What, one naturally wonders, do Ted Kennedy and other liberals think of an 80 percent tax or a 70 percent tax? Is that rate of tax excessive? Where exactly do we draw the line between tax fairness and a tax mugging? Could we all agree that any tax of over 50 percent is unfairly confiscatory?

#ad#It may surprise Ted Kennedy to learn that thanks to the many layers of tax we impose on Americans who engage in the virtuous behavior of saving money, savers often face an effective tax rate that can reach 70, 80, and even 90 percent. This happens because the IRS imposes multiple layers of cascading taxes on money that is saved. These taxes include the income tax, the capital-gains tax, the interest income tax, the corporate tax, and then, finally, the death tax.

Consider the dividend tax, which is the main subject of the Bush tax-cut plan. Some people like Warren Buffet complain that it is unfair to cut the tax on dividends for rich people like him. (He is free not to take the tax cut if he doesn’t want it.) In any case, many millions of Americans, not nearly as rich as Buffet, pay taxes twice for dividends. The company must pay a 35 percent tax on the profits that it earns and then if that after-tax money is paid to the shareholders in a dividend, they get smacked with a tax as high as 38 percent. This works out to a 60 percent tax.

Aha! Here we have a confiscatory rate of tax on owners of stock. And as such, isn’t George Bush then right to call for the end of this double tax on fairness grounds alone?

Most Americans would say yes. Polls over the past ten years have consistently found that the majority of Americans think that no family in America should have to pay more than 25 percent of its income in taxes. As the Wall Street Journal has pointed out in reviewing these polls, the 25 percent cap includes all taxes: sales taxes, property taxes, payroll taxes, income taxes, cigarette taxes, business taxes, car taxes, you name it. The government is not welcome to more than 1/4th, no matter whether we are talking about Bill Gates or the janitor who cleans Bill Gates’s office at night.

The Left in America defines “tax fairness” as soak the rich. If Britney Spears or Kobe Bryant earn too much money this year, according to the greed-and-envy warriors, tax it away from them. By contrast, most people define tax fairness as a policy wherein all Americans live by the same set of rules. And those rules or laws should be applied fairly to all. This is the basis for a just society and one that allows Americans to keep the dividends from their hard work and enterprise. It is the American way.

There are many economic-growth and job-creation justifications for quickly enacting the Bush tax cut. The tax plan will clearly add value to the sputtering stock market. But one rationale for the tax cut that has been overlooked is that ending the double tax on dividends would create a fairer tax system for all of us. Ted Kennedy may not agree with that, but his brother surely did.

— Stephen Moore is president of the Club for Growth.

Stephen Moore — Stephen Moore is an American economic writer and policy analyst. He founded and served as president of the Club for Growth from 1999 to 2004. He was a member of ...

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