There is a persistent idea circulating that the current tax margins are really not all that high when compared to past rates. This line of thought is typically used as justifications that 1) the government deserves more revenue and 2) the wealthy taxpayers can afford higher taxes. The truth, however, is that obtusely higher rates in the past were rarely ever paid at that amount because they were easily offset by abundant tax deductions universally used by the wealthy.
In a recent article, Peter Schiff handily debunks the growing myth that “higher taxes are good for economic growth”. Liberals gleefully cite the strong economy of the 1950s and the 91% tax margin as proof. He uses tax data comparisons and patterns to show how woefully incorrect their assertions are.
What the Left fails to comprehend or deliberately doesn’t explain is that at those times, there were an enormous amount of tax shelters such as real estate, so that people could legally lower that taxable income and would not have to actually pay the outrageous tax rates. But as the Democrats and Obama keep talking about how they need even more income as we approach the next round of talks, you can be sure that there will be renewed talks about upping rates even more.
With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money. Schiff points out,
The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.
For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.
Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed.
We need comprehensive tax reform, but not the type that Obama is pushing. His policies of more “tax credits” (which is government spending run through the tax code) and marginal rate increases hampers our recovery. If the federal tax rates are going to rise again – and they will – in addition to state and local tax hikes, the tax burden in this country will be staggering. People will do one of two things: 1) start finding ways not to pay it like they did when the rates were outrageous or 2) stop working and investing so much because it’s just going to get taken away from them. When that happens, the economy worsens — and it is already suffering enough.
Unfortunately, much of country is under-educated in economics that they just repeat the talking points given to them and contribute to the rising class warfare. “Pay their fair share” neatly implicates someone else, even if that action will ultimately undermine and weaken our economic recovery. But why take additional money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who have proven their ability to mismanage and squander income?