–The liberal mantra that conservatives are bankrupting the nation with their “tax cuts for the rich” depends, for its force, on the economic illiteracy of its audience. When the federal government cuts the tax rate for high-income earners, that doesn’t mean that it’s forking over barrels of cash to wealthy people. Indeed–and this is a point liberals seem congenitally incapable of grasping–it doesn’t even mean that the government winds up collecting less money.
Suppose a rich guy is earning $1,000,000 per year–in keeping with liberals’ cartoon views of such matters, let’s call him Chadwick Worthington III. Suppose, further, he’s being taxed at 35 percent. That means he’s paying $350,000 per year in taxes. If you cut his tax rate to 25 percent, in theory he’d be paying $250,000 per year–which means $100,000 more in Chadwick’s pocket, and $100,000 less in the government coffers.
But here’s the twist. Like most people who earn $1,000,0000 per year, Chadwick doesn’t punch a time clock and simply pick up a check for 20 grand every week. Chances are he earns the money through a combination of guaranteed salary, bonus incentives, and private investments . . . or perhaps he owns a small business and takes a share of the profits. So when Chadwick hears that his income-tax rate has been cut from 35 percent to 25 percent, he doesn’t simply lie back on the sofa and think, “Now I can afford that expensive new polo pony!” More likely, he tries to think of ways to earn even greater sums of money because now he can keep 75 percent, rather than 65 percent, of it. Maybe he hires a personal assistant to help him reach higher bonus incentives, or maybe he plows more of his personal wealth into the stock market, or maybe he opens up another branch office of his small business.
Each of these measures stimulates the economy–this is the essence of supply side economics–resulting in more jobs, and thus more taxpayers . . . but that’s of no concern for Chadwick, who, after all, is only looking out for numero uno. What matters to him is that, one year later, he’s earning $2,000,000–out of which, the government is now taking 25 percent. So a year later the government winds up collecting $500,000 in actual revenues. In other words, he’s getting taxed at a 10-percent lower rate than the year before, but in reality he’s paying $150,000 more in taxes.
If you don’t think this kind of thing happens, consider economic history: After President Kennedy cut the top tax rate from 90 percent down to 70 percent, actual tax revenues rose from 94 billion dollars in 1961 to 153 billion in 1968. After President Reagan initiated across-the-board tax cuts, overall tax revenues jumped from $599 billion in 1981 to $909 billion in 1988.
President Bush’s tax cuts seemed, at first, to break the pattern. Before he came into office, in 2000, tax revenues stood at a record $2,025 billion. They shrank to $1,991 billion in 2001, the first year of Bush’s presidency (and the year of the 9/11 attacks) . . . then shrank to $1853 billion in 2002 . . . then shrank to $1,782 billion in 2003. But that was the bottom. Tax revenues rose to $1,880 in 2004. The Congressional Budget Office estimates tax revenues for 2005 will hit $2,154 billion–in other words, the government is now hauling in more money in taxes than it ever has before.
This would be impossible if “tax cuts for the rich” meant less overall tax revenues.
Of course, the cut-tax-rates-raise-tax-revenues formula has definite limitations. If you cut the rates to nothing, or next-to-nothing, overall tax revenues are certain to drop. But cutting tax rates, per se, does not mean cutting tax revenues. The evidence on this score is incontrovertible. The basic idea has proven sound.
“Yes,” liberals object, “but cutting taxes for rich people means that the income gap between, on the one hand, rich people and, on the other hand, middle-class and poor people, gets wider.”
What difference does that income gap make in the real lives of the middle class or the poor? Are rich people hording baby formula in their custom-designed pantries? Are they pumping life-saving vaccines into their poodles? Are they driving up the price of yachts that middle class and poor people would otherwise be buying? Wealth is not a zero-sum game. If Bill Gates has $100 billion in assets, that doesn’t mean 100 exceptionally poor people must each be a billion dollars in debt.
To be sure, the tax story is more complicated than just income-tax rates. There are capital-gains taxes, inheritance taxes, real-estate taxes, etc. Each responds to rate cuts in a slightly different way. But rates and revenues never–I repeat, never–line up squarely.
Politicians of both parties, Republicans and Democrats, may well be driving the nation into bankruptcy–but they are doing it by spending, not by tax cutting. On the contrary, tax cuts are one of the few things that actually generate revenue which minimally offsets the spending orgy.