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Taxing the rich: It might just be detrimental


Using recent data, in other words, it would appear on its face that the Democratic proposal to raise taxes on the upper-income earners, and lower taxes on the middle- and lower- income earners, will result in huge revenue losses on both accounts. But some academic advisers to Democratic candidates have a hard time understanding the obvious, devising outlandish theories as to why things are different now. Well they aren’t!

In the 1920s, the highest federal marginal income tax rate fell to 24% from 78%. Those people who earned over $100,000 had their share of total taxes paid rise — from 29.9% in 1920 to 48.8% in 1925, and then to 62.2% in 1929. There was no inflation over this period.

With the Kennedy tax cuts of the 1960s, when the highest tax rate fell from to 70% from 91%, the story was the same. When you cut the highest tax rates on the highest-income earners, government gets more money from them, and when you cut tax rates on the middle and lower income earners, the government gets less money from them.

Even these data grossly understate the total supply-side response. A cut in the highest tax rates will increase lots of other tax receipts. It will lower government spending as a consequence of a stronger economy with less unemployment and less welfare. It will have a material, positive impact on state and local governments. And these effects will only grow with time.

Mark my words: If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years until a new Harding, Kennedy or Reagan comes along.

Trained economists know all of this is true, but they try to rebut the facts nonetheless because they believe it will curry favor with their political benefactors.


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I agree

Saturday 26th of January 2008

Alright, makes sense Mr. Laffer. But why at the end of your article do you say that we will have to wait for another Harding, Kennedy or Reagan. Didn't you say that President Clinton cut Capital Gains from 28% to 20% in 1997 thus leading to a surplus? Let's give credit where credit is due. And you should also point out that no matter what kind of tax revenue we bring in, it does no good at all if we continue deficit spending far beyond our means,i.e. the fiscal debacle we face now!

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