So, everyone out there making more than $250,000 a year is going to end up subsidizing the rest of us who make less. Let’s pretend we can squeeze enough out of you folks alone to pay off our federal debt - just as it’s necessary to believe in Peter Pan if you want to visit Never Land. Most people whose income falls short of that plateau think this would be just dandy. Except some of us have some nagging doubts and think that soaking the rich will work about as well as appealing for voluntary contributions to balance our nation’s budget.
I didn’t always think this way. I come from a working class background and in my youth harbored its typical mistrust and resentment of rich folks. In fact, I still feel more at ease drinking beer in a neighborhood bar than sipping $12 martinis. (Confession: I’ve since acquired a taste for martinis, but mostly I mix my own because it blows my mind to think of paying double-digit dollars for any alcoholic beverage that doesn’t come in six packs.) Only because of service in the U.S. Army and its GI Bill was I able to be the first in my family to afford college.
As a young liberal arts graduate, my working class ethos was reinforced by the socialist sympathies common to college professors and students then as now. I pretty much bought into the dogma that the world we live in is unfair, the gap between haves and have-nots way too wide, and the way to level the playing field is for government to redistribute wealth through taxation.
Actually, I still believe the world is unfair and that it would make for a better society if wealth were more evenly distributed. It’s just that I’ve learned during more than three decades of covering the world of business and economics that trying to achieve this utopia by soaking the rich makes for a cure that ultimately worsens the disease.
Alas, trouble was brewing. Double-digit inflation was raging and by the end of the decade interest rates were in the high teens. The economy went into a tailspin and these issues played a large role in the 1980 election of Ronald Reagan.
Something else remains vivid in memory from that era. Federal tax policy was skewed toward soaking the rich - even more so than today. When President Reagan took office in 1981, the top marginal income tax rate was 70 percent. That’s right, the IRS attempted to confiscate seven out of every 10 bucks earned once people reached the highest income plateau.
Note that word attempted. A stark reality was that almost nobody paid that 70 percent rate. Instead, a huge industry arose of lawyers and CPAs who themselves climbed to the highest income bracket due to their skill in exploiting tax loopholes. Hotels everywhere were booking tax shelter seminars. Many extremely wealthy individuals renounced their American citizenship and took up residence in one of several little Caribbean island nations that sprouted up as tax havens and laid out the welcome mat for well-heeled Americans.
A lesson that has never been grasped by the soak-the-rich crowd is an economic corollary to Newton’s Third Law of Motion - to every action there is an equal and opposite reaction. You can’t try to confiscate large portions of peoples’ money and expect those people to behave in the same manner. Just as you get them in your crosshairs, they dodge away.
Fast-forward to today. As sure as the sun rises in the east, as the bite increases on taxpayers earning more than $250,000, they will seek out angles to retain their money. They will finagle cash payments, increase 401(k) contributions, invest in tax-free bonds, hang on to stocks rather than cash in capital gains, and plenty will just plain cheat. Some will reduce the amount of income they earn. Many productive citizens near the threshold will decide it’s not worth working as hard for diminished returns, so two-income families will trade down to one breadwinner, people will take more time off, opt for early retirement and so on.
The soak-the-richers will then scratch their heads wondering why tax revenues are less than anticipated, and they will once again tap into the sacred creed of their ideology - increase taxes some more. Only this time, tighten up all the loopholes.
Except the tax fanatics are always going to lose that battle. Here’s why. Let’s give credit where it’s due: our federal government employs some very smart people. Hundreds of these very smart people in the executive and legislative branches put their talents to work crafting ingenious tax laws and regulations that seem to cover every possible contingency. Then the law gets enacted and takes effect on the private sector.
There the document engages not hundreds, but hundreds of thousands of equally smart lawyers and accountants who will probe for loopholes. When one inevitably discovers something exploitable, that person will earn a lot of money spreading the word via articles, books and seminars on how to avoid the new taxes. Tax law writers are like a rural teacher’s college trying to compete in football against USC or Texas.
Something else is worth recalling: the Reagan Administration slashed that top tax rate from 70 percent to 28 percent, and it set the stage for a quarter-century of the greatest prosperity in the history of mankind. The only balanced federal budgets we’ve had in the last half-century occurred during the Clinton Administration, driven not by high tax rates but by windfall tax dollars generated by that prosperity.
The Reagan Administration was driven by the notion that lower tax rates result in more spending and investment by people in the private sector, which grows the economy and leads to more tax revenues. They called it “supply side” economics. Its main apostle was economist Arthur Laffer, who pointed out in a long-ago interview with me that although the supply side term was new, it was nothing more than the same policy enacted by President John Kennedy to bring the country out of a business slump that was occurring when he got elected. In the article I wrote Laffer cited several other historical examples of lower tax rates leading to increases in government revenues.
Despite its track record of success, supply side economics has always been treated with scorn by the soak-the-rich crowd, who deride it as “trickle down” economics.
Thus, we are about to try for the umpteenth time to soak the rich in order to pay the enormous bills run up by profligate spenders in both political parties. That smacking sound you hear is that of little Caribbean nations licking their chops.