I'm outsourcing my blog today. Thomas Sowell is an American economist, social critic, political commentator and author.
Can Republicans Talk?
Republicans have the stronger case, but they still need to make it.
The biggest battle in the lame-duck session of Congress may well be over whether or not to extend the Bush administration’s tax cuts, which are scheduled to expire in January. The fact that this decision has been left until late in the eleventh hour, even though the expiration date has been known for years, tells us a lot about the utter irresponsibility of Congress.
Neither businesses nor individuals nor the Internal Revenue Service will know what to do until this issue is resolved. In a stalled economy, we do not need this prolonged uncertainty that can paralyze both consumer spending and investment spending.
Republicans want the current tax rates to continue, and Democrats want only the current tax rates for people earning less than “the rich”– variously defined — to continue, with everyone making more than some specified income to have their tax rates rise next year.
What makes predicting the outcome of this battle very difficult is that Republicans won a big majority in the House of Representatives in the recent election, but the tax cuts are scheduled to expire before the new members of Congress are sworn in — and the Democrats have a big majority in both houses of Congress in the lame-duck session, where this issue will be decided.
Theoretically, the Democrats could win, hands down, since they have the votes. But Congressional Democrats are well aware of how they lost big in the recent election, and some Democrats don’t want to gamble their own jobs in the next election by going the class-warfare route.
Neither the Republicans nor the Democrats can afford to have all the tax rates go up in January because they couldn’t get together and pass a bill to prevent that from happening. But the nature of that bill matters, not just for politicians but — far more important — for the economy.
Former secretary of labor Robert Reich, now a professor at Berkeley, has made the case for the liberal Democrats’ position in an article in the November 28 issue of the San Francisco Chronicle titled “Extend benefits for jobless, not tax cuts for the rich.”
Professor Reich points out that both Republicans and some conservative Democrats say that we cannot afford another extension of unemployment benefits because the deficit is already too large. Then he adds: “But wait. These are the same members of Congress who say we should extend the Bush tax cuts for the wealthy.”
Reich advocates “extending unemployment benefits for struggling families without a breadwinner” because “these families need the money. The rich don’t.”
This is the Democrats’ argument in a nutshell. It seems very persuasive on the surface, however shaky it is underneath. But cuts in tax rates do not mean cuts in tax revenues, as Reich assumes. How the tax-rate battle in Congress turns out may depend on how well the Republicans answer such arguments.
These are not new arguments on either side. They go back more than 80 years. Over that long span of time, there have been many sharp cuts in tax rates under presidents Calvin Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush. So we don’t need to argue in a vacuum. There is a track record.
What does that record say? It says, loud and clear, that cuts in tax rates do not mean cuts in tax revenues. In all four of these administrations, of both parties, so-called “tax cuts for the rich” led to increased tax revenues — with people earning high incomes paying not only a larger sum total of tax revenues, but even a higher proportion of all tax revenues.
Most important of all, these tax-rate reductions spurred economic activity, which we definitely need today.
These are the facts. But facts do not “speak for themselves.” In terms of facts, the Republicans have the stronger case. But that doesn’t matter, unless they make the case, which they show little sign of doing.
Democrats already understand the need for articulation. Robert Reich is only one of many articulate Democratic spokesmen. But where are the articulate Republicans? Do they even understand how crucial articulation is? The outcome of this lame-duck session of Congress may answer that question.
Guess who said the following: "It is incredible that a system of taxation which permits a man with an income of $1,000,000 a year to pay not one cent to his Government should remain unaltered."
Franklin D. Roosevelt? Ted Kennedy? Nancy Pelosi?
Not even close. It was Andrew Mellon, Secretary of the Treasury under conservative Republican President Calvin Coolidge.
What was Mellon's point? That high tax rates do not necessarily result in high tax revenues to the government. "It is time to face the facts," he said. Merely having high tax rates on large incomes will not bring in more tax revenues to the treasury, because of "the flight of capital away from taxable investments."
This was all said in 1924, in Mellon's book, "Taxation: The People's Business." Yet here we are, more than 80 years later, still not facing those facts.
It is not just a question of what Andrew Mellon said. It is a question of hard facts, easily checked in official documents available to all-- and ignored all these years.
Internal Revenue Service data show that there were 206 people who reported annual incomes of one million dollars or more in 1916. But, as the tax rate on high incomes skyrocketed under the Woodrow Wilson administration, that number plummeted to just 21 people reporting a million dollars a year in income five years later.
What happened to all those millionaires? Did they flee the country? Were they stricken with fatal diseases? Did they meet with foul play?
Not to worry. Right after Congress enacted the cuts in tax rates that Mellon had been urging, there were suddenly 207 people reporting taxable incomes of a million dollars or more in 1925. As Casey Stengel used to say, "You could look it up." It is on page 21 of an Internal Revenue publication titled "Statistics of Income from Returns of Net Income for 1925."
Where had all the income of those millionaires been hiding? In tax-exempt securities like state and local bonds, among other places. Mellon had urged Congress to end tax exemptions for such securities, even before he got them to cut tax rates. But he succeeded only with the latter, and only after a political struggle with those who made the same kinds of arguments that are still being made today by those who cry out against "tax cuts for the rich."
Still, one out of two is not bad, when it comes to getting Congress to do something that makes sense economically, rather than something that looks good politically.
The government, which collected less than $50 million in taxes on capital gains in 1924, suddenly collected well over $100 million in capital gains taxes in 1925. At lower tax rates, it no longer made sense to keep so much invested in tax-exempt securities, when more money could be made by investing in the economy.
As for "the rich"-- who really were rich in those days, when $100,000 was worth more than a million dollars is worth today-- those in the highest income brackets paid 30 percent of all taxes in 1920 and 65 percent of all taxes by 1929, after "tax cuts for the rich."
How can that be? Because high tax rates on paper, that many people avoid, often does not bring in as much tax revenue as lower tax rates that more people actually pay, after it is safe to come out of tax shelters and earn higher rates of taxable income.
The investors do this because it makes them better off, on net balance, even after they pay more money in taxes on incomes that have gone up. More important, the economy benefits when there is more investment in things that create more jobs and rising output.
None of this was unique to the 1920s. The same scenario played out again in later years, during the Kennedy, Reagan and Bush 43 administrations.
But economic success is not the same as political success. As former House Majority Leader Dick Armey put it, "Demagoguery beats data."
As long as the voters keep buying the "tax cuts for the rich" demagoguery, politicians will keep selling it. And it will keep selling as long as it goes unanswered. The question is whether today's Republicans understand that as well as Andrew Mellon did back in the 1920s.