Tax facts and fan­tasies: Most ir­re­spon­si­ble Congress ever

The Washington Times Weekly - - Commentary -

Never has the ex­pres­sion “What planet are these peo­ple from?” seemed more ap­pro­pri­ate than when it refers to the ac­tions of the ma­jor­ity of Democrats in the House of Rep­re­sen­ta­tives on the pro­posed tax bill com­pro­mise. In the real world, their choice is that they ei­ther vote for the com­pro­mise, which means no one will suf­fer a tax in­crease as of Jan. 1, or that ev­ery­one will have a huge tax in­crease. Also, the low­est wage earn­ers will see a 50 per­cent jump in their tax rates, from 10 per­cent to 15 per­cent. The main point of the House Democrats’ pique is that some “rich” Amer­i­cans may be able to avoid hav­ing more than 50 per­cent of their in­comes con­fis­cated by the govern­ment and that those peo­ple’s heirs may not have to pay a 55 per­cent tax on their in­her­i­tance if the com­pro­mise bill passes.

Pres­i­dent Obama and his left-wing friends keep telling us that the “rich,” mean­ing any fam­ily whose com­bined in­come is more than $250,000 an­nu­ally, can “af­ford” to pay more. “Af­ford” is an in­ter­est­ing term in that it refers to the abil­ity to pay but de­notes noth­ing about the will­ing­ness of the per­son to pay or the jus­tice in mak­ing the per­son pay.

As can be seen in the ac­com- pa­ny­ing ta­ble, those among the top 1 per­cent of in­come-tax pay­ers earn 20 per­cent of the in­come but pay al­most 40 per­cent of the tax bill, which is dou­ble their pro­por­tional share. Those in the top 10 per­cent of in­come -tax pay­ers earn a lit­tle more than one-third of the in­come but pay al­most 70 per­cent of the to­tal tax. At the other end of the scale, the bot­tom 50 per­cent of tax­pay­ers earn about 13 per­cent of the in­come but pay less than 3 per­cent of the tax. In re­al­ity, most of the bot­tom 50 per­cent of tax­pay­ers re­ceive much more in govern­ment pay­ments and in-kind ben­e­fits than they pay in, so the dis­pos­able-in­come dis­crep­ancy is much smaller than it may seem.

Us­ing the “af­ford to pay” stan­dard, Bill Gates and War­ren Buf­fet could more eas­ily af­ford to pay 99 per­cent of their in­comes than a mar­ried cou­ple with two kids in col­lege mak­ing $250,000 per year, pay­ing tax at a 50 per­cent rate. Tax­pay­ers liv- ing in ju­ris­dic­tions where the max­i­mum state and lo­cal tax is 11 per­cent or more (e.g., Ore­gon, Hawaii, New York and Cal­i­for­nia), com­bined with the pro­posed higher max­i­mum fed­eral tax rate of 39.6 per­cent, cou­pled with the re­duc­tion in us­able ex­emp­tions, will have ef­fec­tive mar­ginal rates of more than 50 per­cent). Ques­tion: If “af­ford­abil­ity” is the cor­rect stan­dard, why don’t those of the left who want higher taxes ar­gue for a 99 per­cent rate on the su­per-rich? I ex­pect their an­swer is that “most would be un­will­ing to pay,” which is, of course, true.

Good tax econ­o­mists know (from em­pir­i­cal ev­i­dence) that over the long run, tax rates on in­come and cap­i­tal of more than 30 per­cent, and per­haps as low as 20 per­cent, re­sult in lower rather than higher rev­enue. So, when you hear that those pur­ported 10-year tax rev­enue losses will re­sult in keep­ing the max­i­mum in­di­vid­ual tax rates at just 35 per­cent, you should know that the per­son (whether it is some govern­ment of­fi­cial, a mem­ber of Congress or some­one in the me­dia) is ig­nor­ing the ev­i­dence. It also is worth re­mem­ber­ing, when you hear some­one blath­er­ing about how much more tax rev­enue will be re­ceived from tax­ing the “rich” more, that max­i­mum in­come tax rates have var­ied be­tween 28 per­cent and 91 per­cent over the past half­cen­tury, yet tax rev­enues as a per­cent­age of gross do­mes­tic prod­uct have con­tin­ued to av­er­age about 18 per­cent, re­gard­less of the max­i­mum rate.

Re­peated sur­veys of the Amer­i­can peo­ple over the years have shown that most peo­ple do not think any­one should be taxed more than 20 per­cent of his or her in­come. So what is the jus­tice in mak­ing some peo­ple — of­ten the most pro­duc­tive — pay more than 50 per­cent?

If the House Democrats do man­age to block the com­pro­mise, even un­der­stand­ing that the new Repub­li­can-con­trolled House will vote for it in Jan­uary, the eco­nomic dam­age will be con­sid­er­able. Busi­nesses and in­di­vid­u­als will still be un­cer­tain about their tax rates and li­a­bil­i­ties as they go into the New Year, which will de­press hir­ing and ex­pan­sion, and in­creased tax with­hold­ing will de­press per­sonal in­come. Now, even the Obama White House ad­mits that such a de­lay in pass­ing the tax bill could re­sult in a dou­ble-dip re­ces­sion, which would greatly en­large the deficit.

The Pelosi Congress has been the most ir­re­spon­si­ble — ever. For the first time, Congress did not pass a bud­get (and the fis­cal year has been un­der way for three months) or any of the ap­pro­pri­a­tion bills be­fore the lame-duck ses­sion. Congress has had two years to clar­ify the tax sit­u­a­tion, yet it may not even do so be­fore Christ­mas. Have they learned noth­ing?

Richard W. Rahn is a se­nior fel­low at the Cato In­sti­tute and chair­man of the In­sti­tute for Global Eco­nomic Growth.

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