Soak the Rich: Cut Their Tax Rates!

Commentary by Pete du Pont

Raising taxes on the wealthy has been a staple of liberal dogma since Karl Marx championed the idea in Das Kapital in 1867. Modern liberals - Clinton, Kennedy, Bonior, et al - always see the need to raise taxes on the wealthy to make them pay their "fair share."

But if that is the liberals' goal, their ways and means of reaching it are badly flawed. For if you want to soak the rich, cut their tax rates!

A revealing analysis by Ed Rubenstein, "When Less Is More: Tax Lessons of the 1990s," in the October 31st edition of the on-line public policy weekly, IntellectualCapital.com, reached just this conclusion: reduce tax rates on the wealthy and their share of tax payments will increase.

Rubenstein looked at three significant changes in tax policy enacted in the '80s and '90s: the Reagan tax cut of 1981, and the Bush and Clinton tax increases of 1990 and 1993. His conclusion: the wealthy paid significantly more taxes after tax rates were cut in 1981; they paid much less in taxes when rates were raised by President Bush in 1990; and not much more after the Clinton tax increases of 1993.

Rubenstein's data demonstrate that four years after the Reagan tax cuts of 1981 "overall tax collections increased by 16%" but "people making more than $200,000 were paying 127% more taxes in 1985 than they had been in 1981." IRS data show that people with incomes of $100,000-200,000 were paying 41% more; $200,000-500,000 76% more; and those with incomes above $500,000, 201% more taxes. All this while marginal tax rates on these people were dropping from 70% to 28%.

The Bush tax rate increases of 1990 had just the opposite effect. His new 31% tax bracket for people making $200,000 or more reduced tax payments for those taxpayers by $2.5 billion, or about 2.4%. Rubenstein explains: "But for everyone else, [those with incomes less than $200,000] tax payments actually rose, by $3.6 billion, or 1%. This odd dichotomy makes it difficult to blame the entire reduction in income tax revenues on a weak economy. The rich didn't have a bad year, they merely changed their behavior in response to higher tax rates. They bought more municipal bonds, converted ordinary income to capital gains, worked less, and shifted discretionary income to 1990, when rates were lower. In the process, they foisted a larger share of the tax burden on less affluent taxpayers...."

The Clinton tax increase adds further basis to Rubenstein's thesis. Like Bush, Clinton created a new, higher rate bracket for the wealthy: 39.6% instead of 31% on individuals earning more than $200,000. One would think that this higher rate would have produced higher tax payments by the very wealthy. It did, 11.4% more revenue in 1993 than in 1992. But tax revenues from the $100,000-200,000 income individuals - to whom the new rate did not apply - rose about the same amount, 11.7%. So, "instead of collecting an extra $16 billion from taxpayers in the $200,000+ income group, as was forecast, Uncle Sam received just $5 billion."

Rubenstein analyzed what happened. "In analyzing the tax results, Harvard economist Martin Feldstein finds that affluent people reported nearly 9% less taxable income in 1993 than they would have at the old tax rates. This was accomplished in many ways. High income taxpayers made more aggressive use of existing tax loopholes. Or they simply worked less. Working wives seemed especially affected by higher tax rates. The percentage of families with two or more earners fell from 58.2% in 1989 to 56.4% in 1993."

"At the end of the day," Rubenstein concludes, "income tax revenues fell to 9.3% of personal income in 1993, down from 9.6% in 1989, when the top rate was still 28%."

The bottom line is simply this: "Federal income tax rates for affluent taxpayers were increased twice in the 1990s. Wealthy taxpayers, however, account for a smaller share of income tax payments today than before the rate hikes."

Raising tax rates on the wealthy turns out to be a net loss; the economy suffers but the wealthy are unaffected. Incentives to save and invest and work are reduced; only class warfare rhetoric is increased.