Despite false claims by liberals, the federal government actually collects more money when it reduces taxes.
There is a great deal of debate in Washington about how to get our budget under control. It’s clear that something dramatic needs to be done, and soon. It’s simple math — we cannot continue borrowing 40 cents of every dollar we spend without eventually going bankrupt. I believe we need to significantly reduce spending, reform entitlement programs and enact permanent restraints on the size of government to keep us solvent over the long term.
Yet, there are others in Washington who want to take action of an entirely different kind. They believe we can solve our enormous fiscal problems by raising taxes. A former Clinton administration official recently proposed 70 percent income tax rates. One witness before the Senate Finance Committee even suggested rates
of 90 percent!
Almost all economists agree that higher taxes are the last thing we need during a time of persistently high unemployment and a sluggish economy. But there are other compelling reasons not to raise taxes.
In a recent op-ed in The Wall Street Journal, economist Alan Reynolds examined the relationship between taxes and their effect on government revenues. Reynolds specifically looked at tax rates over the last six decades and what he discovered was this: higher rates do not necessarily result in more revenue for the government. In fact, in many cases, it is actually an inverse relationship, with higher taxes resulting in lower revenues and lower taxes resulting in higher revenues.
When the highest U.S. tax rate was 91 percent, income tax revenues amounted to about 7.7 percent of gross domestic product (GDP). When President Kennedy cut that rate to 70 percent, revenues did not fall as one might expect. In fact, revenues grew to 8 percent of GDP.
Fast-forward to the Reagan years. When President Reagan cut the top rate to 50 percent, revenues again went up to 8.3 percent of GDP. And when he cut that rate in half to 28 percent, revenues stayed nearly the same at 8.1 percent.
And when it comes to raising taxes, the opposite has also largely held true. Tax increases in the early 1990s actually caused revenues to decrease to just 7.8 percent of GDP. When President Clinton hiked rates again a few years later, the revenue percentage barely budged; in fact, the government actually collected more revenue under Reagan’s 28 percent rate. How is this so? Taxes on economic activity are a disincentive for such activity, so there is less of it — resulting in lower tax revenue.
So, as politically advantageous as “soaking the rich” may sound to some — including President Obama — the fact remains that tax hikes seldom increase revenue to the government; therefore, their effect on reducing today’s massive debt load is likely to be negligible.
To assume we can solve our problems by raising taxes, and especially by raising them on the businesses and individuals who invest and create jobs when we need them most, simply does not wash with the facts.
Remember, we didn’t get into this financial mess because we didn’t tax enough; we got into this problem because we’ve been spending too much.