The message from President Obama, the Democrats and most of the media is that current deficits resulted from decades of tax cuts, and now, jacking up tax rates is the only “responsible” thing to do.  Anyone who opposes tax hikes isn’t serious about the deficit, they say.

One would never guess from listening to the tax complainers that the government collected more tax revenue in 2007, the fourth year of the current, Bush tax rates, than any previous year ever.

Had Congress spent just 6% less in 2007 the federal budget would have been in balance that year.

Government tax revenue is down since 2007 due to the financial crisis and severe recession that followed.  But the current tax rates generated seven of the top ten revenue years in US history.

The chart below tracks tax revenue and spending over the past 40 years.  Twice during that period there were major reductions in all tax bracket rates:

• the Reagan tax cuts of the early 80s, and,
• the Bush tax cuts of 2003.

In both cases tax revenue to the government had been declining before, and then increased after the tax cuts were implemented.

Spending increased continuously over the 30 years covered by the chart, consuming every dollar of increased tax revenue except for the brief period of budget surplus at the end of the 90s.  Those surpluses were due entirely to a spike in capital gains tax revenue generated by the dot-com stock market bubble.  When the bubble burst and stock prices dropped the capital gains windfall ended.  But the perennial increase in spending continued without a hiccup.

Not withstanding the assertions from Obama and the Democrats it’s not at all certain that:

• The tax rate increases on “the wealthy,” including two million small businesses, will generate more revenue than the current tax rates, or,
• Congress won’t immediately increase spending by an amount equal to or greater than any increase in tax revenue that may happen, with our without tax rate hikes.

But, they claim the Bush tax cuts were a give-away to the wealthy.  One gets the impression that the whole problem is declining revenue from top bracket taxpayers.  Again, as the chart shows reality contradicts the political-media establishment.

For 50 years the tax grabbers in Washington have used deficits to justify tax rate increases.  But they have almost always spent in excess of revenue, always creating the next deficit that justified the next tax increase.

The spending cut Vs tax hike debate will resume next week when the new session of Congress begins.  There is no guarantee but maybe this will be the moment when Republicans grow a spine and do what they  were elected to do: cut spending and just say no to tax hikes.

As the chart shows tax revenue is growing again, as the private sector claws back from recession.

President Obama and the Democrats blame their massive deficits on the Bush tax cuts, especially for “the rich.”  The political-media establishment rarely reports that:

• Individual income tax revenue increased four years in a row, to an all time high after the current tax rates, called the Bush Tax Cuts, were enacted in 2003.
• Under the current tax rates individual income tax revenue increased 47% from 2003 to 2008
• Tax revenue from “the rich” earning over $200,000 grew 71% from 2003 to 2008
  

The shocking growth of government debt is the establishment’s justification for ratcheting up tax rates on “the rich,” including millions of investors and small business employers who will be the sources of capital needed to create jobs and economic growth.

The establishment media continuously reminds us that there was a surplus in 2000 and blames the Bush tax cuts for today’s river of red ink.

But as we reported here, the Bush tax rates, enacted in 2003, generated record-breaking revenue to the government.

So whose fault is it that a budget surplus in 2000 became a debt crisis today?  Not the taxpayers.  Certainly not the top bracket folks, the 4.8% of taxpayers who provide 37% of tax revenue.

The debt crisis was caused by irresponsible politicians in Congress who have spent like a teenager turned loose in the mall with an unlimited credit line, to shower himself and his friends with goodies.  And the malfeasance was bi-partisan.

These charts tell the story:

Whenever we mention spending we get angry emails from Leftists who tell us it was the wars in Iraq and Afghanistan (which they oppose) that drove spending so high.  So we’re adding this chart to set the record straight.

Much of the communication from the political establishment targets people who are not inclined to spend hours verifying “information” in the media.  After the Bush tax cuts were enacted in 2003 the continuous deceptive message was that they were only for “the wealthy” or “the top 2%.”  

But now the Bush tax cuts are about to expire.  If Congress does not act there will be a substantial increase on every income tax payer, from top to bottom.

So now it’s time for a revised message.

The new message is that  President Obama and the Democrats want to extend the Bush tax rates for you, if you’re in the middle class but not for the hated wealthy.

Obama and the Democrats have controlled all three branches of government for  22 months.  Back in 2009, while they were still basking in the after-glow of their election triumph they could easily have passed legislation that would make the lower bracket Bush tax rates permanent while raising the upper bracket rates.  But apparently they wanted to keep their options open – including the option to let the all Bush tax rates expire, reaping a windfall for government.

After they decided not to deal with looming tax increases before the election, The Big Three, Obama, Reid and Pelosi solemnly promised they would enact appropriate legislation in the lame duck session.

But now the lame duck session is half over, House and Senate are on extended Thanksgiving vacation, and there has been only talk – no action.

Apparently, there are not enough Democratic votes to enact the upper bracket tax increase, even though all the Democrats who lost their seats in the election are still in place until the end of the year.

Apparently, the Big Three would rather let all the Bush tax rates expire than allow a vote on a bill that would extend them all because they know that bill would pass.

I say we have turned it around, and here’s how we’re gonna create the jobs. We’re not gonna go back to those policies that in fact stripped you of your job. Look, the basic difference between us and Republicans is—and they’re good guys—they still genuinely believe this idea of the Laffer curve. That if you cut taxes—even though it hadn’t worked twice when they tried it—it’s gonna create jobs.

It’s Astounding that Biden saw fit to sneer at The Laffer curve, an economic theory more than validated by historical experience. Named for economist Arthur Laffer the curve demonstrates an obvious economic truism:

A higher tax rate does not necessarily produce more revenue to the government, and an lower rate does not necessarily produce less.

Changes in tax rates effect resulting tax revenue in two ways:

• The arithmetic effect is deceptively simple.  It predicts that a tax rate change will result in a revenue increase or decrease in direct proportion.
• The economic effect recognizes human nature and the motivational result of tax rate changes on work, saving, investment and risk taking, the activities that produce taxable income.

The Left-leaning political-media establishment generally disregards the economic effect, or gives it very little weight when they assert amazingly precise predictions as to revenue increases or decreases from given tax rate changes.  They ignore human nature, and assume everyone will produce the same amount of taxable income no matter how high the tax rate.  Thus their predictions virtually always turn out to be wrong.  But they are never held accountable for inaccurate projections of the past and their predictions of future tax revenue increases and decreases are always treated as absolutely factual and reliable.

In the current tax debate Obama and the Democrats insist that if the top income tax brackets remain at the “Bush rates” enacted in 2003, government will collect $70 Billion per year less than if rates go back up to where they were before the Bush tax cuts.  But as the chart shows this assertion contradicts historical reality.  Before the rates were lowered by the Bush tax cuts revenue from top bracket tax payers had declined for three years.  When the rates were reduced revenue increased each year until the mortgage meltdown and recession hit in 2008.

Obviously, it’s possible that the tax rate increases Obama demands would result in less taxable income in the top two brackets which, tragically, would also be symptomatic of less capital investment in business expansion, resulting in fewer jobs and thus, less revenue from tax payers in the middle class tax brackets.  Revenue from the rich could down and total revenue from all tax brackets could go down.

Biden simply could not be more wrong about the historical tests of the economic principle illustrated by the Laffer curve.  Since the income tax was enacted there have been four major tax-rate cuts:

• the Harding-Coolidge cuts of the mid-1920s;
• the Kennedy cuts of the mid-1960s;
• the Reagan cuts of the 1980s; and,
• the Bush cuts of 2003.

Each of these tax cuts resulted in business expansion, job creation, increased tax revenue to the government, and greater prosperity.

Biden says cutting taxes “didn’t work twice when they tried it.”  These two charts document the last two times “they” tried tax cuts, During the Reagan Administration and in 2003 during the Bush Administration when the rates now in effect were established.

Unfortunately the horrific recession, brought on by malfeasance at Fannie Mae, Freddie Mac, and some in the private mortgage industry, bought the era of prosperity following the Bush tax cuts to an abrupt end.  But the efficacy of the Laffer principle was proven over the four years before the mortgage meltdown began.

The tax rates implemented by the Bush tax cuts of 2003 are still in effect but are set to expire January 1 if Congress does not act. President Obama and the Democrats want to raise tax rates on those who earn more than $200,000.

Half the over-$200,000 taxpayers targeted for an increase are small business employers.  Yet the Democrats and their media supporters keep telling us the Bush tax cuts didn’t help create any jobs. Therefore they claim, increasing small business tax rates now will not diminish future job creation.

Democrats’ note that there were only a few more jobs at the end of Bush’s eight years than at the beginning in 2001.  Therefore, their argument goes, the tax rates that were enacted in 2003 and are still in effect today never helped create any jobs.

It’s true that the total number of private sector jobs was about the same at both ends of the Bush Administration.  But that simplistic comparison doesn’t account for all that happened over those eight years, and hides the fact that there was a four year period of very strong job creation.  Here are the historical details the Democrats hope we’ll all forget:

• Due to the post dot-com recession job losses began the month Bush was sworn in.  The 9-11 terrorist attacks directly caused the loss of an additional million jobs.
• In 2001 Congress enacted a schedule of tiny incremental reductions in tax rates to be phased in over four years. This proved ineffective and job losses continued through 2002 and into 2003.
• In May, 2003 Congress abandoned the incremental schedule and enacted new, substantially lower tax rates for all brackets.  These “Bush tax rates” are still in effect today.
  
• Job growth began four months later in September, and continued over 51 months for a total of 7.3 million private sector jobs.
  
• In 2008 the mortgage crisis brought on another, severe recession and 4.4 million jobs were lost in Bush’s final year.

Obviously, 2008 was an economic nightmare.  But there is no connection between the tax cuts of 2003 and the mortgage malfeasance that caused the economic crisis, the recession and the massive job losses of 2008 and 2009.  Nor is there any evidence that raising tax rates now will either help create more jobs or prevent another financial crisis.

As the chart above indicates, the stimulus has failed.  Job losses continued for almost a year after the stimulus was enacted on President Obama’s promise that it would “immediately jumpstart job creation.”

• After the 2003 tax cuts it took 27 months to replace the jobs that were lost in 2001 and 2002 due to the dot-com recession and the 9-11 attacks.
• If current job growth continues at the 2010 rate it will take 65 more months to replace all the jobs lost in 2008 and 2009.

After the Bush tax cuts Employers created jobs for a total of 51 months, bringing private sector employment to an all time high of 115,574,000 in December, 2007.  Unfortunately, millions of those jobs were lost due to the mortgage crisis and the brutal recession that followed in 2008 and 2009.

The Obama agenda of massive new intervention in the private economy plus continuous threats of tax increases has spooked large and small businesses, causing them to be reluctant to risk any new job creating investments.

It will take even longer if small business employers are hit with a tax increase.

…we have a big deficit problem. We have a great jobs problem. Better to put the money into deficit reduction creating jobs than give it to the millionaires and billionaires.

Schumer ran two phrases together as if doing so made sense:

• “put the money into deficit reduction,” and
• “creating jobs.”

His obvious motive was to deceive the audience in 5 ways:

1. Schumer’s operating assumption, that a higher tax rate will produce more revenue, is not the verifiable certainty he wants you to believe it is.  As the chart shows, tax revenue from the rich declined from 2000 to 2003 when the tax rates Obama wants to reimpose were in effect.  Then, after the lower, Bush tax rates were enacted, tax revenue from the rich went up, not down, for four years.  Due to the financial crisis and recession, revenue from all tax brackets decreased in 2008, the latest statistics available from the IRS.
2. The phrase “deficit reduction,” when spoken by Charles Schumer is a meaningless slogan.  He has always supported massive spending initiatives, without any consideration of the deficit.  If he did care about the deficit he  would not have supported President Obama’s $787 billion stimulus, enacted 22 months ago on the promise that – somehow – it would create jobs.
   
3. There is no logical argument leading to the conclusion that a tax increase on high income people – who, as business owners and investors are the source of the capital that funds business start ups and expansion – will result in more jobs.  Leaving less capital in their hands can only result in fewer jobs.
4. By putting these two phrases together Schumer suddenly reversed his and Obama’s position of the past two years, that massive government spending of borrowed money was the formula for job creation and prosperity.  Indeed deliberate deficit spending to create jobs was the stated goal of the Obama stimulus!
5. The government will not, by maintaining the top tax brackets at the same rates that have been in effect since 2003, “give” money to millionaires.   The money in question belongs to the tax payer who earned it, not to the government.  The question is not how much to “give” to taxpayers, but how much of the fruits of their labors and investments will be taken away from them

As always in Washington, the debate includes a lot of false assertions. On Fox News Sunday White House Adviser David Axelrod dodged a question with one of the most often repeated Obama/Democrat talking points:

We can’t afford…tax cuts that will go almost entirely to millionaires and billionaires.

The goal of this assertion is to plant in the mind of the audience a vision of the idle rich, whose investments generate income in the millions or even billions each year, sipping champagne on enormous yachts.  But that vision is a deception.  Most upper bracket taxpayers earn less than $1 million, and half of them are owners of small businesses, not idle yachtsmen.

If the Democrats really wanted to a tax increase only on Millionaires they would propose one.  But it would not generate a significant amount of revenue because, as the chart above shows, it would hit too few taxpayers.

So instead they talk about millionaires and billionaires but demand tax hikes on people with lower incomes.

The charts display IRS data from 2008, the latest year available.  Half the taxpayers earning over $200,000 were actually small business owners who are required by the tax code to report the incomes of their businesses on their personal tax returns.

As the lower chart shows, most small business income was reported by taxpayers in the over $200,000 bracket.  These are the most successful of small businesses, the ones that are or soon will be in a position to expand and hire additional employees.  They’re also the small businesses targeted for tax increases.

Myth 1 is heard in several variations usually bellowed by an impassioned candidate or special interest spokesman:

• “The growing deficits are caused by ever increasing cost of the military and  two wars.”
• “The immense military, bigger than [fill in the blank] causes the deficit.”
• “Military spending crowds out ‘investments’ in our people.”
• “Military spending has grown and grown to the point that we can no longer afford it.”
  

The chart compares the cost of National Defense, including the cost of Veterans Benefits to a federal budget category: “Payments for Individuals” (P.F.I.)

This excerpt from Treasury Dept. historical tables describes Payments for Individuals:

The basic purpose of the payments for individuals aggregation is to provide a broad perspective on Federal cash or in-kind payments for which no current service is rendered, yet which constitutes income transfers to individuals and families.

…OMB budget document

The key phrase is “no current service is rendered.”  P.F.I. does not include salaries, wages or benefits paid to federal employees, military service members, or contractors, all of whom do provide current services.  This category is made up entirely of cash or in-kind benefits or income transfers including, Social Security, Medicare, Medicaid, Employment training programs, food stamps, social services, welfare payments and unemployment benefits.

This chart demonstrates that the growth segment of the federal government over  the past half-century has been social programs.  Most of the social programs that now consume more than 60% of federal spending were created after 1960.  As spending grew each year to pay for ever expanding benefit programs the fraction of the total spent on National Defense, the federal government’s most fundamental responsibility decreased.

The Treasury Dept. includes Veterans benefits in the P.F.I. category.  For purposes of the chart above we took veterans benefits out of P.F.I. and added them to Military Defense.  Currently, veterans benefits are about 2.5% of total spending

President Obama and Democrat leaders in Congress have decided that income tax rates for “the rich,” those earning more than $200,000, must be increased.

One of their justifications is the claim that at current rates these taxpayers are paying “less than their fair share.” But they always assert “the wealthy” aren’t paying their fair share.  When asked how much the wealthy should pay their answer is always the same:

More!

.

Obviously, “fair” has no definition. But we thought it would be interesting to see just what portion of the total those being targeted for a tax hike actually do pay.

The above-$200,000 group includes only 3.1% of all taxpayers.  In 2007 they paid 54.6% of all income tax revenue collected by the government, the highest in history.  The 2007 percentage was almost ten points higher than the highest of the Clinton years.

As we reported here most of the taxpayers in the over-$200,000 bracket are small business, the employers who usually create most of the new jobs that lead America out of  recessions.  Obama and the Democrats should have to explain how they think a tax increase on these businesses would help create more jobs.

The establishment politicians and commentators who make this claim expect you to conclude that the rich paid less income tax after the Bush tax tax rate reductions than before.   This chart, showing the most recent figures available from the IRS tells the truth.

As the chart shows, revenue from the top group was falling each year until the Bush tax cuts were enacted in 2003.  Then revenue increased every year until taxable small business profits were hit by the recession that began in 2008.

If government had collected less tax revenue from “the rich” – mostly small business owners – after the rate reductions they might deserve a share of the blame for deficits.  But in fact, the rich paid more – a lot more.

The establishment elite demonstrate their understanding of the disincentive effect of taxation when they call for taxes on choices and behaviors they dislike.  They advocate:

• Higher gasoline tax to “nudge” us out of cars and into mass transit;
• Taxes on sodas and sweets to keep us from getting fat and burdening their government dominated health care “system.”

But those same elites scoff at the obvious disincentives inherent in high income tax rates.   The income tax is a tax on risk-taking, saving, investment, and productive work – all the activities necessary for job creation.

Because higher rates on “the rich,” especially small business owners, discourage work, saving and investing, the people they are designed to target respond by curtailing business activities and thus earning less taxable income.   As a result, higher rates don’t necessarily generate more revenue.  Lower rates are less of a barrier to risk-taking, investment, business expansion and hiring, all the activities that generate more taxable profits.

In fact, as this chart shows, after the tax cuts of 2003 the deficit declined, as the rich paid more income tax.
This is not the first time higher income folks paid more income tax after a rate reductions.  During the Reagan Administration there was a series of phased in rate reductions from 1981-83, and another rate reduction in 1986.  The results:

• In 1980 there were eight tax brackets and the highest was 70%.   People earning more than $200,000 reported a total of $36 Billion in income and paid $19 Billion in tax.
• In 1988 there were only two tax brackets, 15% and 28%.  The over-$200,000 group reported $353 Billion in income and paid $99.7 Billion in tax.

Over eight years taxable income reported by “the rich” rose 881% and income tax collected from them rose 425%!  But even though the government was the beneficiary of this huge windfall the political-media establishment still promotes the deception that the Reagan tax cuts caused deficits.

House Speaker Nancy Pelosi was asked about the future of the Bush tax cuts of 2003.

Those tax cuts are scheduled to expire at the end of 2010.  If Congress doesn’t act tax rates will increase substantially in 2011.  Ms. Pelosi’s answer echoed the political-media establishment.  She wants to extend the tax cuts for lower income groups but not for “the rich.”

High end tax cuts have not created jobs, they have increased the deficit and they should be repealed.

In this series we’ll consider her assertion, starting with jobs.

Private sector jobs are not created by Presidents, Congress or government.  They are created when businesses risk their capital resources on expansion.  And small businesses create most new jobs.  

Any tax on a small business reduces the resources its owners can invest in expansion and job creation.  Government doesn’t create jobs but it can encourage more job creation with lower rather than higher taxes.  So-called “high end” taxpayers, those earning more than $200,000 that Obama and Pelosi have targeted for tax increases, are mostly small businesses.

At any given time the level of taxation is only one of several economic balls in the air.  Business expansion and job creation may also be affected by new technologies, demographics, prices, wars, interest rates, and a host of other factors.

But to prove her assertion that the Bush tax cuts did not help businesses create more jobs from 2003 to 2007, Ms. Pelosi will have to come up with some dazzling, counter-intuitive arguments.

As everyone is painfully aware, Job creation turned into job losses in 2008.  But there is no reasonable argument that the tax rate reductions of 2003 caused the banking and mortgage crises of 2008 that decimated the economy.  Nor, is there any coherent argument that the big tax increase on small businesses and investors, now scheduled for January, will somehow help them create more jobs in 2011.

They have suddenly pivoted from profligate spending to seeking ways to wrench more money out of the private sector into the government till.

The first group Democrats want to suffer tax punishment as a result of the Obama deficits is “the rich,” defined as earning over $200,000, who are now targeted for a tax increase.

The problem with a tax hike on  “the rich,” as more and more Republicans are finally saying out loud, is that it’s also a tax hike on the small business sector that creates most of the new jobs.

But Democrats and their cheer leaders in the media are not impressed by this argument.  In an article titled “GOP Fairy Tales” Mother Jones writer Kevin Drum echoes the claim being heard all over Washington:

…only 1.9% of small businesses are in the top two tax brackets that would be affected.

Mr Drum apparently thinks the reader will conclude that this means an insignificant effect on small business job creation.  But this is fallacious reasoning.  It’s true that a small minority of business owners are in the over $200K bracket, about 10% according to IRS statistics from 2007, the latest available.   But these are the very businesses that can create the most jobs, because they have the most after tax profit to reinvest.

The important statistic is not what fraction of small businesses earn a lot but what fraction of the group being targeted for a tax hike is small businesses.  It turns out that most high income tax payers receive part or all of their income from business ownership.

Millions of small businesses are part time and/or employ nobody but the owner.  Millions more are just a bit larger, employing the owner plus one or two people.  Only a tiny  fraction of  those “very small” businesses will emerge as growing enterprises that create any jobs.

The small businesses that create most of the new jobs in America are the very ones the Democrats have targeted for tax increases, the businesses with enough profits left over after supporting the owners to reinvest in expansion and job creation.

Creating Jobs by Reinvesting After-Tax Profits

The businesses that will be hit by the tax increase are the larger “small businesses” that DO create jobs, such as construction, or restaurant, or technology  firms.  These businesses create new jobs by  reinvesting profits. Every dollar of increased taxation, is one less dollar available to reinvest in expansion and job creation.

The Bottom Line

• More small business expansion is funded by reinvesting after-tax profits than by borrowing.  Since the banking crisis began in 2008 small businesses have suffered dramatically reduced access to credit.  Therefore, after-tax profits are even more critical if they are to expand and hire more people.

• Government has no system to identify and count the jobs that won’t be created because of tax hikes on “the rich.”

• Through tax increases on “the rich” Government will seize from the private sector some of the resources that empower free people to use their liberty to create prosperity.  Politicians will use these resources to support expanded political power and reward special interest constituencies with political connections.