In Defense of the 'Unfair' Tax Cut
A recent opinion piece in the Crimson called President Reagan's tax-cutting proposals "a perverse form of Robinhoodism in which the rich steal from the poor."
While it is true that those with the largest tax bills will receive the largest refunds, the cut will actually benefit the poor by reducing their share of the tax burden. Additionally, they will benefit from the trickle-down effects of increased economic investment and productivity.
The charge that Reagan's across-the-board tax cut will redistribute income from the poor to the wealthy is simply unfounded and ignores the lessons of previous tax cuts in this country. The 1922-25 Harding-Mellon tax cut illustrates how a tax cut not only increased revenues, but also decreased the relative tax burden of the poor. Before the Harding-Mellon cut, tax rates in the United States ranged from 4 to 73 per cent. In 1922, the World War I tax surcharge was reduced, lowering the top rate from 73 to 58 per cent. In addition, Congress repealed the wartime "excess profits" tax and lowered the taxes on capital gains.
Income tax receipts in 1922 exceeded all expectations, and these increased receipts enabled the government to grant retroactively 25 per cent refunds the next year. Two successive reductions further cut rates from a range of 1.5 to 2.5 per cent.
Internal Revenue Statistics compiled by the House Republican Conference show that the cuts reduced the total amount of taxes paid by poorer citizens while the amount of taxes paid by the middle class remained the same, and the tax bill of upper-income citizens actually increased, in spite of the lower rates. The conference's statistics show that from 1921 to 1925, the total income tax paid in the $0-$5000 class dropped by 85 per cent: in the $5000-$10,000 class by 57 per cent: in the $10,000 to $15,000 class by 57 per cent: in the $15,000 to $20,000 class by 39 per cent. Those with incomes ranging from $20,000 to $50,000 paid virtually the same taxes. But above $50,000 total tax revenues soared, even at the lower rates. In the $50,000-$100,000 class revenue increased by 28 per cent; in the $100,000-$500,000 class by 64 per cent; in the over $500,000 class by 114 per cent.
The net result was a redistribution of the income-tax burden from the poor to the rich--a fact that directly contradicts the dire predictions of Reagan's critics. By 1925, the 44 per cent of the taxpayers at the lowest end of the scale were actually removed from the rolls through a personal exemption. From 1921 to 1925, the share of the tax burden paid by those earning less than $10,000 fell from 22 to 4 per cent. In contrast, the share of the taxes paid by the over $100,000 class rose from 28 to 49 per cent. By 1928, this wealthier class carried 61 per cent of the tax burden, paying $714 million, more than the total income-tax receipts for 1963 of 1964.
Total government revenues increased every year in which the rates were cut. (This excludes 1923, for which a retroactive 25 per cent was authorized, and revenues declined 23 per cent.) Revenues in 1921 amounted to $719 million--by 1928, tax revenues stood at $1.16 billion. Moreover, since prices actually were declining, the real increases were somewhat greater. somewhat greater.
The Kennedy tax cut of 1964-1965, which trimmed both personal and corporate rates, had similar results. Those earning below $10,000 paid a total of 15 per cent less. Tax-payers earning above this paid a greater total amount of taxes at the lower rates. Once again, a tax cut similar to the one proposed by Reagan's redistributed the income-tax burden in a way that benefitted the poor. What's more, the government increased its total tax revenues 31 per cent in four years.
A third, more recent experience with tax cutting was the Steiger Amendment. Passed over Jimmy Carter's objections in 1978, it lowered the capital gains tax from 49 to 28 per cent. Opponents of the amendment projected a 30-per-cent revenue loss in 1979. The actual result: a 20 per cent increase in tax revenues at the lower rate.
The evidence is clear. Previous tax cuts have not only increased the government's total revenues, they have also shifted a significantly greater share of the tax burden onto the higher-income sectors of society. The charge that the plan is unfair to the poor is clearly unfounded.
A second criticism of the Reagan plan--that it is inflationary--also lacks merit, especially since the cuts are to be accompanied by budgetary and monetary restraint. Economist David I. Meiselman told a Joint Economic Committee in February that there is not dependable correlation between tax rates and inflation. What the data does indicate is that "higher tax rates seem to be associated with higher prices." Meiselman said. This should not be surprising. Inflationary pressures develop when the supply of money exceeds the supply of goods. Overtaxation of production inhibits the supply of goods, thus fueling inflation.
The basic point is simple, classical, and unassailable; as the Wall Street Journal wrote in a recent editorial. Whatever increases real human output is anti-inflationary. Tax cuts encourage increased human output. At the higher end of the income scale, more funds become available for investment in new machinery and enterprise.
At the lower end of the income scale, where the major disincentive is the low cost of leisure, tax cuts encourage harder work.
The counter argument that cutting tax rates increases the federal deficit, which is monetized, thereby generating inflation is also a spurious one. First, in light of historical precedent a reduction in tax revenues is by no means certain--in fact, unlikely. Second, even if the tax cuts do increase the deficit, they in no way obligate the Federal Reserve to crank up the printing presses.
Inflation continues to push people into higher tax brackets, discouraging work, savings, and investment. Today, every ten per cent increase in income means a 15 per cent increase in taxes. It is understandable that the savings rate in the United States is among the lowest of any industrialized nation.
To deny President Reagan his tax-cutting plan is to tear the heart out of a olid, well-conceived economic policy. When all the rhetoric is pushed aside, the indisputable facts are the following:
* Cuts in high marginal tax rates have not resulted in revenue loss in the past; in fact, they have resulted in revenue gain.
* Previous tax cuts have actually shifted a significantly greater share of the tax burden onto the higher income sectors of society.
* No causal relationship between tax cuts and inflation has been established.
David Rozzell is a graduate student in chemistry and a member of the Independent Political Forum.