ObamaNomics Part III: Higher Tax Rates
Obama is a conventional, old school leftist. He obstinately denies an obvious economic truth that has been demonstrated three times in the past fifty years: lower income tax rates can and do generate more prosperity and more income tax revenue to the government than higher tax rates.
Revenue increases resulted from the Kennedy tax cuts of 1963, the Reagan tax cuts of 1981 – 84, and now the Bush tax cuts of 2003. Each time, the Left warned that revenues would plummet. Each time, the Left was wrong.
In his “Major Address on Economics” Barack Obama asserted:
“For eight long years, our President sacrificed investments in health care, and education, and energy, and infrastructure on the altar of tax breaks…”
He hopes to plant in the mind of the listener the perception that government “invests,” or spends too little because tax revenue has declined. But this is a major deception.
In ObamaNomics Part II are the data showing that first “problem” Obama promises to solve, too little government spending, doesn’t exist. The real problem is too much spending.
What about taxes?
One would conclude from listening to Senator Obama and the relentlessly negative media herd, that the other big problem in this country is lack of tax revenue to the Federal Government. We’re told that “Bush tax cuts” have starved the government of needed revenue from individual income tax.
The truth is 180 degrees opposite.
Taxable, individual income peaked in 2000 as the dot-com stock bubble burst and millions of investors sold their shares, generating taxable capital gains. The taxes were paid to the government in 2000 and early 2001. Then, income tax revenue began to fall as the nation slid into recession. Income tax revenue dipped even more when the 9-11 attacks caused thousands of small businesses to suffer losses, and a million workers to lose their jobs.
There were tiny reductions in income tax rates in ’01 and ’02 but they were too small to serve as an economic stimulus.
In 2003 Congress enacted major tax rate reductions, usually called “the Bush tax cuts.” There were reductions in all the graduated income tax rates, and the maximum capital gains rate was reduced from 20% to 15%. The maximum tax on stock dividends was reduced from 39.6% to 15%.
Each data point on the green line in the chart below represents individual income tax revenue for 12 months. The first point shows total individual income tax revenue for the 12 months ending January, 2001 at just over $1 Trillion Dollars. The second point represents total individual income tax revenue for the 12 months ending February, 2001, and so on.
The chart shows that after the last of the taxes on 2000 income and capital gains were paid in April, 2001, (the fourth data point) income tax revenue began falling, and continued to decline for three years.
Income tax revenue finally began to recover in mid-2004, reflecting the economic stimulus effects of the major tax rate reductions of 2003. Lower tax rates stimulated greater business investment, resulting in higher employment and greater taxable profits. As the chart shows, under the tax rates enacted in ’03, income tax revenue has steadily increased for four years, to the highest level in history.
From this income tax revenue data the following conclusions are obvious:
- The lower tax rates enacted in ’03 ultimately generated more income tax revenue than the previous, higher tax rates.
- When Obama and the media herd say the big problem in this country has been low tax revenue due to tax cuts, they are not telling the truth. In fact, revenue from personal income tax is now the highest in American history.
- We may now be entering a period of declining revenues resulting from mortgage problems and various financial industry contractions that have caused increased unemployment and decreased stock dividends, capital gains and small business profits.
- Obama’s plan to increase rates on capital gains, stock dividends, and upper income earners to the pre-2003 level would shrink small business investment and increase unemployment, which in turn would result in reduced taxable income from wages, capital gains, dividends, and profits. The drop in taxable income would mean less, not more, income tax revenue from the higher rates.
In this post Mr Boomerjeff makes an observation that apparently has to be relearned by people every few election cycles. Using the common econometric technique of smoothing he shows the trailing twelve months govt tax revenue over time, removing volatility in the data stream associated with artificial calendar or government year end dates. This shows the real ebb and flow of tax receipts.
And what do we see?? As he points out, once again the cry from the left that we have a tax problem is laid threadbare. Just as with the Kennedy and Reagan tax cuts government tax revenues soared to new heights after Bush’s cuts. We have no shortage of taxes, and haven’t for 50 years. Why does this surge occur? Each time the same reason: cuts in marginal tax rates mean the marginal advantage to productive work and investment increases. You can deny it, but its no different than the law of gravity.
What is perhaps most offensive about Obama’s assertion is the notion that this is a contest between taxes and vital spending. Any cursory inspection of government spending over the last 50 years reveals it has far,far outpaced population growth and inflation by a wide margin. Government is spending a fortune – and taxing a fortune – but it never seems to be enough. (This may be a topic of a future post).
To put it in the vernacular – Politicians have managed to create the worlds largest poker game, where they relentlessly tax money into the Washington pot, and then Senators and Representatives compete to see who can best return those dollars to their constituents………in return for a vote, of course. Politicians who play good poker get re-elected.
The only real problem with the poker analogy is that in a poker game you actually get all the dollars in the pot. With government there are so many lobbyists, govt workers and assorted piglets slopping at the trough that the pot is half empty by time it gets distributed. In some neighborhoods that would get you shot. With government, it gets calls for more taxes.
Obama says we are neglecting vital spending because we lack taxes.
Infrastructure, an expenditure that most would agree is a legitimate govt activity, has been neglected for 30-40 years. This has nothing to do with the prevailing tax rates. It has to do with where the money is spent, and non-infrastructure spending appears to get more votes. I guess medicare spending is like the ace of spades, and spending on the crumbling roads, the 2 of clubs. Education? Spending is higher than ever, even if performance is not. The Joker card I guess.
The fact of the matter is that we a have a spending problem, and the spending problem primarily is centered on transfer payments: taxing one guy so they can give it to the guy down the street.
Mr Boomerjeff has it right, Barack Obama is anything but a fresh face for “new politics.” He’s a standard issue old line leftist who never saw a tax he didn’t like, a spending program he couldn’t peddle for a vote, and a potential tax source he couldn’t demonize.
But then those of us from Chicago already knew that. Will the country catch on, or do we need Jimmt Carter II?