‘Laffer Curve’ economist: Ignore tax reform buzzkill from Congress
Why on Earth would Congress want to limit the deductibility of 401(k) contributions or add a fourth tax bracket for the rich or any other such nonsense? The president’s tax bill is beautiful on its own and will create all sorts of jobs and raise real wages for those who already have jobs. Contrary to what some may think, it’s great for the middle class. Limiting the deductibility of 401(k) contributions won’t help growth; neither would adding a fourth higher-tax ratebracket help growth. A great middle-class pro-growth tax cut doesn’t have to stick it to the rich, either symbolically or in reality. Economic growth is the only answer.
Including a fourth tax bracket for high-income earners would blunt the full positive impact this tax bill would have on the economy. Don’t forget that people respond to incentives and that those in the highest tax brackets, generally speaking, have more ways to avoid taxes than do lower-income tax bracket earners. They are able to hire accountants, lobbyists and all sorts of other favor-grabbers to guide them in lowering their tax burden per dollar of income. Behavioral effects at play here are one of a handful of reasons that cutting the highest marginal income tax rate has a greater positive economic impact than cutting any other income-tax rate, per dollar of static tax revenue lost.
As Jack Kemp repeated over and over, “You can’t love jobs and hate job creators.” Or, in the slightly more homespun version of Phil Gramm, “I’ve never been hired by a poor person.” Rich people are the conduit through which prosperity flows. They are facilitators, not our enemies. Just look at what happened in the past.
In 1978, the top 1 percent of income earners paid taxes equal to 1.5 percent of gross domestic product in spite of a high 70 percent income-tax rate, a 40 percent capital gains tax rate, and a 48 percent corporate tax rate. The bottom 95 percent of income earners back then paid three and a half times as much in total taxes as did the 1 percenters.
By 2000, the highest income tax rate was down to 39.6 percent, the capital gains tax rate was down to zero percent on owner-occupied homes while everything else was taxed at 20 percent and the corporate tax rate had been lowered to 35 percent. And lo and behold, the top 1 percent increased the amount of taxes they paid to 3.3 percent of GDP and the taxes paid by the bottom 95 percent fell to 4 percent of GDP. And best of all, the U.S. had a budget surplus. The lesson to take away is that tax revenues from the top 1 percent increased when their tax rates were lowered and the U.S. economy boomed, benefiting everyone.
The Reagan/Clinton story of tax cuts, economic growth and budget surpluses, as good as it was, was a remake of the 1960s Kennedy tax cuts. President John F. Kennedy cut the highest marginal income tax rate from 91 percent to 70 percent, cut the corporate tax rate from 52 percent to 48 percent, initiated a 7 percent investment tax credit along with accelerated depreciation and reduced tariffs by 35 percent. The economy surged like you wouldn’t believe. Tax revenues rose enormously, and the U.S. budget went into a surplus.
And without knowledge of what would be, President Kennedy in a 1963 interview with newscasters Huntley and Brinkley said prophetically, “If we can get the tax cut, with the stimulus it will give to the economy, that we will get our budget in balance quicker. …” It was true then; it was true under Reagan and Clinton; and it’s just as true now.
The one key lesson from the Kennedy and Reagan tax cuts is that people respond to incentives. The last thing we’d ever want to do is discourage employers from employing or investors from investing or job creators from creating jobs. Raising the highest tax rates or limiting the tax deductibility of 401(k) contributions would be a buzzkill for the very people we need to implement a pro-growth agenda.