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Democrats' insistence that the "rich" pay more in taxes is rivaled only by Republicans' apparent inability or unwillingness to engage them on this specific issue. In the following excerpt from testimony submitted to the Senate Finance Committee, economist Thomas Sowell attempts to fill that void.
Sowell on "Tax Cuts for the Rich": Part 1 | Part 2 | Part 3
First Of Three Parts
At various time and places, particular individuals have argued that existing tax rates are so high that the government could collect more tax revenues if it lowered those tax rates, because the changed incentives would lead to more economic activity, resulting in more tax revenues out of rising incomes, even though the tax rate was lowered.
This is clearly a testable hypothesis that people might argue for or against on either empirical or analytical grounds. But that is seldom what happens.
Even when the particular tax-cut proposal is to cut tax rates in all income brackets, including reducing tax rates by a higher percentage in the lower-income brackets than in the upper-income brackets, such proposals have nevertheless often been characterized by their opponents as "tax cuts for the rich" because the total amount of money saved by someone in the upper-income brackets is often larger than the total amount of money saved by someone in the lower brackets.
Moreover, the reasons for proposing such tax cuts are verbally transformed from those of the advocates — namely, changing economic behavior in ways that generate more output, income and resulting higher tax revenues — to a very different theory attributed to the advocates by the opponents, namely "the trickle-down theory."
"Trickle down" is not an economic theory.
No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter's monumental 1,260-page "History of Economic Analysis." Yet this nonexistent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena, and has been repeated as far away as India.
It is a classic example of arguing against a caricature instead of confronting the argument actually made.
While arguments for cuts in high tax rates have often been made by free-market economists or conservatives in the American sense, such arguments have also sometimes been made by people who were neither, including John Maynard Keynes and President John F. Kennedy, who in fact got tax rates cut during his administration.
Implicit in the approach of both academic and media critics of what they call "tax cuts for the rich" and a "trickle-down theory" is a zero-sum conception of the economy, where the benefits of some come at the expense of others. That those with such a zero-sum conception of the economy often show ...
The arguments of the proponents and opponents of tax-rate reductions have been arguments about two fundamentally different things: (1) The distribution of existing incomes and existing tax liabilities. (2) Incentives to increase incomes by reducing tax rates, so as to get individuals and ...
Last month's unemployment figures shocked by being worse than expected by every single economist surveyed. Unemployment will likely stay surprisingly high because government is winning its long war of attrition against the primary driver of employment — small business. Small businesses are ...
Some of us called it the man-cession. In the deep recession that lasted from December 2007 to June 2009, according to the National Bureau of Economic Research, many more men than women lost their jobs. The imbalance was huge. The Bureau of Labor Statistics showed a decline of 5.4 million jobs for ...
The Great Recession's aftermath roiled state budgets and gave new urgency to questions about the size and scope of government — how much to tax, how much to spend and how much power to cede to unions. The answers lie in the movement of people across state lines — Americans voting with ...
Posted By: SCFTBL1(5) on 7/21/2011 | 10:48 AM ET
This is a reminder of how economic illiteracy is propagated by the main stream media. When Obama demands that the Republicans accede to his demands to raise tax rates on the "rich", somehow it is never mentioned that the top ten percent already pay more than half of the income taxes. If you are a democrat and want to get elected or reelected, class warfare is your first argument and the truth be damned. The argument on raising the debt ceiling has not changed in 50 years and we are in
Posted By: OldOllie(5) on 7/21/2011 | 1:20 AM ET
Republicans have failed MISERABLY to explain simple economic concepts. First, anyone who says "job creators" should be slapped...HARD! They're called "EMPLOYERS!" Say it with me: "You don't create jobs by raising taxes on EMPLOYERS. Second, anyone who uses the word "taxes" should be punched in the face. When you say "cut taxes," people think you mean to cut tax revenues. But if you don't distinguish between tax RATES and tax REVENUES, ho
Posted By: mesterharm(5) on 7/20/2011 | 11:45 PM ET
Of course the government offers tax free bonds because it's in their advantage. If they can lower the interest rate on those bonds and still get people to invest, because of an increase in the marginal tax rates, they could effectively refinance the debt at a lower rate.
Posted By: jmoz(5) on 7/20/2011 | 1:06 PM ET
Dr. Sowell's explanation could not be more clear. For those who don't grasp it, here is an example. If you have $1,000 to invest, let's say your options are a tax-free muni***l bond that pays 3%, or a taxable instrument that pays 4.5%? Which will you choose? Assuming a 35% marginal tax rate, you will have more earnings from the 3% tax-free bond. Marginal income tax rates are key to investment decisions.
Posted By: MGabel(10) on 7/20/2011 | 9:42 AM ET
To be a true American, you don't have to be a millionaire or a billionaire, nor do you have to like them. However, you must protect the aspiration and ability to become one.
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