The difference between raising tax rates and raising taxes

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There is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 50 years ago, President Kennedy lowered tax rates and federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.

Even the much-maligned Bush tax cuts did not reduce Federal revenues. In a letter dated May 18, 2007, Peter Orszag, the Director of the Congressional Budget Office  informed the Senate Budget Committee that total federal revenues had increased to $2.4 trillion in 2006 compared to $1.78 trillion in 2003, a 35 percent increase. At the same time the total individual income tax collected had increased to $1.04 trillion in 2006 from $794 billion in 2003, a 31 percent increase. During the same period corporate taxes increased from $132 billion to $354 billion, a whopping 168 percent increase.

Admittedly, the 2003 figures were somewhat low due to the dot-com bust of 2000/2001, but the increased revenue seen in 2006 continued right until the recession of 2008, after which income tax revenues went down although total government revenues stayed up.

Today, total federal government revenues are the highest they have ever been. Unfortunately, during the Obama administration massive government spending far outstripped the increased revenues. Even if Congress was to tax those making over $250,000 at a rate of 100 percent, it would not come close to dealing with the massive debt roll accumulated during the Obama administration’s years in office.

Ironically for conservatives, it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington. Why should this be so?

Lower tax rates would actually grow the economy and produce greater revenues for the federal government. Most people, including those who should know, like politicians and newspaper editors, cannot understand the concept.

But there is another factor. Increasing tax rates only increases tax avoidance strategies, both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50 percent rate rather than 25 percent, the potential reward for deferring, sheltering, or otherwise hiding income has doubled.

No one has ever asked Hillary Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work in the first place. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.

Even assuming that these people had the best of motives, they must have realized that they could achieve greater results with their money than the Federal government could. Why give the government a third or more of your speaking fees when all the fees could go to the Foundation. Of course, they also could be able to maintain control over the tax exempt funds as opposed to leaving it to government bureaucrats to decide. The funds could go to pet causes.

These foundations also help the ultra-rich to avoid dreaded estate or death taxes. Recently multi-billionaire liberal activist George Soros has transferred about $18 billion dollars to his own foundation. He will eventually die but no death taxes will be paid since his foundation will live on. When I worked as a financial planner, it was common to refer to the estate tax as a “voluntary” tax, a tax only paid by those too lazy or stupid to take measures to avoid or minimize it. Actually, the estate tax accounts for a very small share of federal revenue since estates under $5 million are exempt from taxation.

There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals from IRAs and 401k type plans.

President Trump is also right about lowering the corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer.

Also, corporate accountants are paid to find ways to create strategies that will minimize corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states as General Electric did in Connecticut. We all know that the high Federal Corporate tax rate has led many domestic companies to relocate overseas.

Inevitably, increases in tax rates never produce the expected tax revenues. Just look at the state of Connecticut. Two years after his election Democrat Gov. Dannel Malloy, and an overwhelmingly Democrat legislature pushed through the largest tax increase in state history. The expected revenues failed to materialize, and the Governor had to raise taxes again to balance his budget. After this second Malloy tax increase, Connecticut is still billions in debt. No wonder the governor has declined to run again.

Francis P. DeStefano, Ph.D., of Fairfield, is a writer, lecturer, historian and retired financial planner.

 

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