Shattering Tax-Cut Myths
WHEN THE BERLIN WALL COLLAPSED, one would have expected Marxist ideology of class warfare to disappear along with it. But this year’s tax debate has shown the politics-of-envy is alive and well. Demagogues are vilifying President Bush’s plan to lower tax rates and repeal the death tax as a “massive giveaway to the rich.”
We should ignore this false rhetoric. Letting people keep more of the money they earn is not a “giveaway,” it’s a smart strategy to boost our economy. The last thing we should do is mimic Europe’s welfare states, which have been economically crippled for years by wealth-redistribution policies. The United States is prosperous in large part because it avoids class warfare.
Most Americans still regard success as something to be admired – and sought after – rather than as something to be envied. But to allow all Americans to reach for success, we must remove the barriers to upward mobility that clutter our tax code.
This is why across-the-board tax cuts are such a good idea. Not to help the rich, but to help others become rich – or at least to rise as far and as fast as their talent, ability and willingness to work hard will take them. But the debate over tax “fairness” isn’t just an ideological battle between those who support a free-market economy and those who desire a welfare state. It’s a factual battle, based on numbers that can be easily checked. And it turns out that many of the claims made by tax-cut opponents wither under scrutiny.
MYTH #1: The rich don’t pay their fair share and shouldn’t get a tax cut.
REALITY: According to the IRS, the top 1 percent of income earners pay more than one-third of the total income tax burden. The top 10 percent pay more than two-thirds. And the bottom 50 percent of
income earners? They pay barely 4 percent of income taxes. That’s why it’s virtually impossible to cut taxes without letting the “rich” benefit.
MYTH #2: Lower tax rates mean the rich will pay less.
REALITY: History shows otherwise. The rich paid more after tax rates were cut in the 1920s, and they also paid more after the Kennedy rate cuts in the 1960s. More recently, President Reagan slashed tax rates in the 1980s. What happened? The top 1 percent went from shouldering 18 percent of the income tax burden in 1981 to paying 28 percent in 1988. The top 10 percent saw their share of the burden climb from 48 percent in 1981 to more than 57 percent in 1988.
MYTH #3: Reducing tax rates doesn’t help the poor.
REALITY: It’s true the poor don’t receive a tax cut when tax rates are reduced, but that’s because they don’t pay income taxes to begin with. Yet this doesn’t mean they receive no benefits. Indeed, because they are on the lowest rungs of the economic ladder, they will be the biggest beneficiaries of faster growth, taking advantage of the new job openings and higher wages.
MYTH #4: With lower tax rates, the rich get richer while the poor get poorer.
REALITY: The class-warfare crowd should remember the words of President Kennedy: A rising tide lifts all boats. Census Bureau data show that earnings for all income classes tend to rise and fall in unison. In other words, economic policy either generates positive results, in which case all income classes benefit, or it causes stagnation and decline, in which case all groups suffer.
MYTH #5: Those who work hard and play by the rules cannot climb the economic ladder.
REALITY: America remains a land of opportunity. Even President Clinton’s Council of Economic Advisers reported that “almost two-thirds of households change income quintiles over 10 years.” A Treasury Department study of tax returns found that, over a 10-year period, the poorest 20 percent were more likely to have climbed to the top 20 percent than to have remained in the bottom 20 percent.
In short, Americans can and do climb the ladder of opportunity – and lower tax rates can help them climb higher and faster.
When politicians pit one income group against another, the only winners are those who believe more power should be concentrated in Washington, D.C. The economic evidence clearly demonstrates that the economy does better when tax rates are lower. Yes, tax cuts would benefit some upper-income taxpayers. But the real winners are typical Americans – rich and poor – who want greater opportunities for themselves and their children.
Dr. Mitchell is the McKenna Senior Fellow in Political Economy at The Heritage Foundation.