The debate about changing the tax code comes up every election cycle. The reality is that the way to increase revenues and shift the tax burden away from lower income families is simple and proven but not politically expedient. They key is to lower, not increase, the income tax on the most productive Americans. This is proven to help tax revenues go up and the tax burden get shifted to this group, not away from it. While this may seem counter intuitive history can objectively show us what the impact of lowering tax rates is thus any debate about their efficacy is purely political.
Some of today’s issues such as health care reform, social security and immigration are often difficult to quantify objectively since we have not had experience with proposed changes. On the other hand we have objective experience with income tax cuts and their benefits. Tax cuts have historically shifted the tax burden from middle income people to the wealthiest Americans while creating jobs and increasing government revenue. Critics, often with the best of intentions, have said that extending tax cuts and further reducing income taxes will benefit the rich over the poor and will lead to more deficit spending. This simply is not the case. The public is told we cannot afford tax cuts due to government spending on entitlements, defense and all of the other important things the government does. While cutting taxes in the face of mounting deficits may seem counterintuitive critics are ignoring history. Past income tax rate cuts have increased government revenues, boosted our economy, created jobs and shifted the tax burden away from low income families to the middle and upper income folks. There is no doubt that we will have to deal with excessive government spending to balance the federal budget. Independent of that reducing the top marginal tax rates, while closing loopholes, is a proven way to increase government revenue and benefit all Americans with the burden shifting to those who can most afford it.
According to US Treasury statistics The Tax Equity and Fiscal Responsibility Act of 1982 (Pub.L. 97-248), also known as TEFRA increased revenues by $130 billion in its first four years – after tax rates were cut dramatically. The top rate was slashed from 70% to 50% . TEFRA was created in response to the recession at the time and faced fierce opposition who felt that taxes should be increased, not decreased, to offset government short falls. Sound like a familiar debate doesn’t it. TEFRA reduced the budget gap by generating revenue through closure of tax loopholes and introduction of tougher enforcement of tax rules, as opposed to changing marginal income tax rates.
The 1984 Deficit Reduction Act increased tax collections by $72 billion in the four years after taxes were cut again. The bulk of these revenue increases came from the wealthiest Americans. This should not have been a surprise.
Across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by “the rich,” and also increased their share of total individual income taxes paid. According to the IRS in 1981 the top 1 percent of income earners paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent – after the top tax rate had been cut from 69.13% in 1981 to 28% in 1988.
The broad-based income tax cuts that President Reagan implemented in the 1980’s set off an entrepreneurial boom that propelled the growth of the economy for the next 20 years. Certainly the Clinton Presidency benefited from the tax cuts, and to Clinton’s credit, he even added his own cut by reducing the Capital Gains Tax.
Reagan’s detractors point to his lack of sensitivity for social issues and the legacy of his deficit spending- yet the legacy is a positive one. In the seven years following the Reagan tax cuts almost 20 million good paying jobs were created (US Dept. of Labor). According to the Bureau of Labor statistics inflation, measured by the consumer price index, increased 49.5% between 1977 and 1981. Between 1982 and 1986 inflation was 19.1% – much lower than prior to the tax cuts.
Those who object to the tax cuts need a vision that takes into account the aforementioned lessons of history. This is a case where those who would benefit the most from lower taxes could be hurt, with the best of intentions, by the current path we are going down. Clearly there is an optimal point below which taxes should not be cut but increasing taxes today does not make sense from either an economic or even social standpoint. Lower marginal tax rates stimulate growth, create good jobs, increase government revenues and shift the tax burden from low income families to upper income payers.
If all of the intellectual energy that is being used to debate historically established facts is channeled into constructive policy, and not promoting partisan rhetoric, all Americans will benefit. Regardless of the current or future regulatory and tax climate we are here for you. Our team works with clients to maximize net returns in a manner consistent with their personal goals, objectives and risk tolerance. We believe that this customized approach to personal vision planning® will give you the best results for your situation. Please contact us, without cost or obligation, whenever we may be of service to you.
Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. All information from sources believed accurate but not guaranteed. No tax or legal advice is intended.