Tax Effect on Government Income

Thomas Sowell has published on Townhall.com that raising taxes on the rich does not usually increase income for the government, as President Obama has told the American people it will.

Many people are under the impression that those who oppose higher taxes claim that if taxes are lowered or not increased, the money left in the coffers of the wealthy will “trickle down” to the rest of the population. Nobody seems to know where this claim for “trickle down” effect came from; but it has never been the claim of knowledgeable economists. And…“trickle down” is not the reason conservatives want the Bush tax cuts to stay in effect for everyone.

Several presidents, including President Obama, know that raising taxes does not usually increase government income. As President Kennedy once explained, investors' "efforts to avoid tax liabilities" made them put their money in tax shelters, because existing tax laws made "certain types of less productive activity more profitable than other more valuable undertakings" for the country.

The Obama campaign's attacks on Mitt Romney for putting his money in the Cayman Islands substantiate the point that President Kennedy and others have made, that higher tax rates can drive money into tax shelters, whether tax-exempt municipal bonds or investments in other countries.

As far back as the 1920s, a huge cut in the highest income tax rate -- from 73 percent to 24 percent -- led to a huge increase in the amount of tax revenue collected by the federal government. Why? Because investors took their money out of tax shelters, where they were earning very modest rates of return, and put their money into the productive economy, where they could earn higher rates of return, now that those returns were not so heavily taxed.

This was the very reason why tax rates were cut in the first place -- to get more revenue for the federal government. The same was true, decades later, during the John F. Kennedy administration. Similar reasons led to tax rate cuts during the Ronald Reagan administration and the George W. Bush administration.

All of these presidents -- Democrat and Republican alike -- made the same argument for tax rate reductions that had been made in the 1920s, and the results were similar as well. Yet the invincible lie continues to this day that those who oppose high tax rates on high incomes are doing so because they want to reduce the taxes paid by high income earners, in hopes that their increased prosperity will "trickle down" to others.

 Well…all this nonsense about “fairness” we are hearing from the President is just election year propaganda. The top 10% of present day earners already pay 50% of the federal budget—where’s the “fairness” in that figure?