How Capitalism Will Save Us (37 page)
Read How Capitalism Will Save Us Online
Authors: Steve Forbes
Nor did the rich get a free ride from those cuts. According to Stephen Moore’s study for the National Center for Policy Analysis,
[T]he rich did not get a huge tax cut from the capital gains cut; in fact, the percentage of income taxes paid by the rich increased from 34 percent to 39 percent from 2002 to 2005 (the most recent year for which data are available). The capital gains tax cut did not only benefit wealthy Americans; more than half of all tax filers with capital gains had incomes of less than $50,000 in 2005 and more than two-thirds had incomes of less than $100,000.
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Many have wondered why capital gains are taxed at all. Capital and income are two very different things. Income is the fruit that comes from ongoing enterprises. Capital fuels the enterprises and investments that drive growth and generate income for many. Reducing the amount of capital through taxation reduces this societal benefit. Free-market skeptics fail to understand this Real World economic truth—the “gain” produced for government by taxing capital is far outweighed by the cost to the economy and to people.
REAL WORLD LESSON
Capital gains taxes penalize the critical risk taking essential to business investment and growth. Cutting or eliminating capital gains taxes would benefit not only the rich, but people of all incomes
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Q
W
HY NOT JUST GIVE MONEY DIRECTLY TO THE POOR INSTEAD OF GIVING TAX CUTS TO THE RICH?
AB
ECAUSE ACROSS-THE-BOARD CUTS HELP MORE PEOPLE AND ARE THE BEST REDUCERS OF POVERTY
.
A
question that has been raised by tax-cut opponents is “How are the poor going to be helped by tax cuts when many of them pay little or no taxes?” Barack Obama’s campaign tax proposal favoring tax credits to lower-income people—instead of an across-the-board cut in tax rates—was based on this thinking. People who already paid no taxes would receive their tax “credit” in the form of a check from the government.
Giving money to people sounds generous. For politicians it can get votes. But in the Real World it is at best a one-shot solution that doesn’t go very far. In fact, Real World experience shows that meaningful cuts in tax rates are the best way to generate more money for the poor.
We’ve explained in detail why this is so earlier in this chapter: cuts in tax rates boost the economy. Not only do such reductions let entrepreneurs and individuals keep more of what they earn, but even more important, lower tax rates increase incentives to take risks, to work more productively, to succeed. More people are hired. More wealth is produced. The result is a bigger, stronger tax base that produces more tax revenues that can be used to help those in need.
Analyst Brian Riedl of the Heritage Foundation points out that tax cuts between 1979 and 2003 resulted in not less but dramatically more government spending on the poor:
Anti-poverty spending has leaped from 9.1 percent of all federal spending in 1990 to a record 16.3 percent in 2004. The data clearly show that…the people with the highest incomes are paying more of the tax burden while the poor are receiving more [government social] spending. Yet the misperception that the federal government is doing the opposite persists.
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John Tamny of RealClearMarkets reminds us that expanding the tax base is the best way to increase funding for the poor because of a Real World principle few people know: no matter how much you raise taxes, they tend to remain at a fixed percentage of the tax base—around 18 percent of GDP.
That’s the lesson of the Laffer curve—raise taxes and all that happens is the tax base shrinks. You get 18 percent of a smaller base—in other words, lower collections.
Tamny writes, “What this means is that if we grow the overall economic pie, we expand the taxable base. Sure enough, the reductions in top marginal rates that began in 1981 helped U.S. GDP to grow sixfold over the last twenty-five years and as a result, federal revenues have hit record levels nearly every year since.”
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REAL WORLD LESSON
Tax cuts are the best antipoverty measure because they create the economic growth that lifts people out of poverty through employment while generating tax dollars for government
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QB
UT DON’T TAX CUTS DEPRIVE
U
NCLE
S
AM OF THE MONEY NEEDED TO RUN THE COUNTRY?
AT
AX CUTS OR TAX INCREASES, THERE ARE NEVER ENOUGH REVENUES, BECAUSE GOVERNMENT JUST KEEPS GROWING
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W
e’ve all heard the “logic”: tax increases are the only way to “reduce the deficit” and balance the budget of a government strapped for funds and groaning under the weight of debt made worse by “tax cuts for the rich.”
House of Representatives Speaker Nancy Pelosi, just one of countless politicians and pundits who subscribe to this misconception, declared the Bush tax cuts to be “the biggest contributor to the budget deficit,” said to be $1.3 trillion for fiscal year 2009.
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The populist narrative advanced by Pelosi and others is that the “massive deficits” of the Reagan years and the second Bush administration were the result of tax cuts. Meanwhile, they hearken back nostalgically to the income-tax increases of Bill Clinton, which they insist produced “the Clinton surplus” and an era of prosperity.
The Real World truth is that deficits are not created by tax cuts. And they can’t be fixed by either tax cuts or tax increases—if the size of government keeps growing.
Federal, state, and local government spending grow year in and year out, no matter which party is in power. At the start of the twentieth
century, total government spending on all levels was not even 7 percent of the nation’s economic output. By 2010 it is expected to exceed 41 percent.
Tax cuts may expand the size of the economy. But a larger economy will never generate sufficient revenues if the growth of our sprawling bureaucracy continues uncontrolled and unabated. The big villains, of course, are entitlements, especially Social Security, Medicare, and Medicaid. All three need systemic reforms or they will end up impoverishing everyone, because they will require horrific increases in taxes to meet their growing liabilities. There are positive, exciting ways to change these programs so that, amazingly, they can provide increased benefits without undermining our future. We discuss these in chapters 7 and 8.