At the same time Republicans are adamant that more people should pay income taxes and lukewarm on the idea that Social Security taxes should be cut, they are also calling for the so-called Bush tax cuts to be extended, individual marginal income-tax rates to be lowered, the corporate income-tax rate to be lowered, and certain taxes to be eliminated altogether.
But that is not the only thing that is perplexing about Republican tax policy. Since Republicans don’t oppose taxes on principle, it is no surprise that they likewise miss the point on tax cuts.
Since the beginning of the permanent U.S. income tax in 1913, tax rates have fluctuated widely. They have also been progressive from the very first.
The income tax began with a 1 percent tax on taxable income greater than $3,000. A series of surcharges up to 6 percent were applied to higher incomes, with the maximum rate being 7 percent on taxable income greater than $500,000. Thanks to World War I, the minimum rate doubled and the maximum rate increased to 77 percent on income greater than $1 million. After falling in the 1920s, the top rate rose in the middle of the Great Depression to 79 percent. During World War II, the tax rate reached an astounding 94 percent. The Internal Revenue Code of 1954 established 24 brackets with rates ranging from 20 percent to 91 percent. Only after 1964 was the top rate lowered. Under the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986, the top marginal tax rates were lowered to 50 percent and 28 percent respectively. After rising to 39.6 percent under Bill Clinton, the top rate was lowered to the current 35 percent by the Economic Growth and Tax Relief Reconciliation Act of 2001, which also established lesser tax brackets of 10, 15, 25, 28, and 33 percent.
Unless the Democrats and Republicans in Congress reach an agreement on their extension before the end of this year, not only will the current six tax brackets change for the worse to five (15, 28, 31, 36, and 39.6 percent), many temporary tax-lowering provisions will expire at the end of the year as well. That means that the child tax credit and the section 179 expense deduction will decrease while the maximum long-term capital-gains tax and estate tax rates will increase.
But not only have Republicans argued in favor of extending all of the Bush-era tax-cut provisions, their presidential candidate, Mitt Romney, has called for even more tax cuts.
The proposed Romney tax plan would
- Make a permanent, across-the-board 20 percent cut in marginal rates;
- Maintain current tax rates on interest, dividends, and capital gains;
- Eliminate taxes for taxpayers with an Adjusted Gross Income less than $200,000 on interest, dividends, and capital gains;
- Eliminate the death tax;
- Repeal the Alternative Minimum Tax (AMT); and
- Cut the corporate rate to 25 percent,
In the first presidential debate, Romney not only railed against the tax increases in Obamacare, he said his objective was to “bring down rates, broaden the base, simplify the code, and create incentives for growth.” He claimed that when he was the governor of Massachusetts, he “cut taxes 19 times.” In the second debate, he reiterated that he wanted to get the rates down, simplify the tax code, and “get middle-income taxpayers to have lower taxes.” (Not much was said about taxes in the third and final debate.)
Romney revealed in the second debate one reason that he is in favor of tax cuts:
And the reason I want middle-income taxpayers to have lower taxes is because middle-income taxpayers have been buried over the past four years. You’ve seen, as middle-income people in this country, incomes go down $4,300 a family, even as gasoline prices have gone up $2,000. Health insurance premiums, up $2,500. Food prices up. Utility prices up.
But it is these statements in Romney’s tax plan that encapsulate the typical Republican rationale for tax cuts:
Reducing and stabilizing federal spending is essential, but breathing life into the present anemic recovery will also require fixing the nation’s tax code to focus on jobs and growth. To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government. The principle of fairness must be preserved in federal tax and spending policy.
America’s individual tax code applies relatively high marginal tax rates on a narrow tax base. Those high rates discourage work and entrepreneurship, as well as savings and investment. With 54 percent of private-sector workers employed outside of corporations, individual rates also define the incentives for job-creating businesses. Lower marginal tax rates secure for all Americans the economic gains from tax reform.
Basically, taxes should be cut because it will lead to economic growth, job creation, and investment. That is the party line of all conservative think tanks. It makes for good Republican talking points — and is exactly right. However, Republicans miss the point on tax cuts. And doing so allows Democrats to capitalize on the absence of any real anti-tax Republican principle.
Republicans usually cite this study and that study (usually by conservative think tanks) that provide facts and figures to “prove” that this tax policy or that tax policy will result, or did result, in X amount of economic growth, X percent increase in GDP, and X number of jobs created.
That is exactly what the Romney campaign has done. In “The Romney Program for Economic Recovery, Growth, and Jobs” by R. Glenn Hubbard (Columbia University), N. Gregory Mankiw (Harvard University), John B. Taylor (Stanford University), and Kevin A. Hassett (AEI), the authors maintain,
The Romney tax reform plan will increase GDP growth by between 0.5 percent and 1 percent per year over the next decade.
The Romney economic program will enable the private sector to create an additional 7 million net new jobs over the next decade beyond the improvement in employment from a more robust cyclical recovery in the short-term as a consequence of the Romney economic program.
Real GDP under the Romney plan will be between $5.5 and $6.5 trillion higher than today, and between $2.1 and $3.1 trillion higher in 2022 than it would be under a continuation of current slow growth.
But Democrats have their own economists and their own studies. Speaking recently on NPR’s “Here and Now” Howard Gleckman, resident fellow at the nonpartisan Tax Policy Center and editor of the blog Tax Vox, argued that “the relationship between tax cuts and economic growth is pretty much random; one doesn’t cause the other.” David Leonhardt, Washington bureau chief of The New York Times, maintains in “Do Tax Cuts Lead to Economic Growth?” just the opposite of what Republicans do:
Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression.
That is why Obama could say in the second presidential debate, “We can go back to the tax rates we had when Bill Clinton was president. We created 23 million new jobs. That’s part of what took us from deficits to surplus. It will be good for our economy and it will be good for job creation.”
The other thing about Republicans when they talk about tax cuts is that they are always careful to explain how their proposed tax cuts will be “revenue neutral,” how they will “pay for” the tax cuts, how they will “restore lost revenue,” how they will “offset” the tax cuts, or how the tax cuts will “pay for themselves.” That is why Romney in the first presidential debate went out of his way to emphasize that his number-one principle was that “there will be no tax cut that adds to the deficit.” When Republicans want to really appear economically savvy they will talk about the Laffer Curve and argue that tax cuts just might bring in more government revenue.
Republicans are not opposed to taxes on principle. That is why Romney, like Obama, focuses on cutting taxes primarily for the benefit of the middle class. And it is why Romney, like Obama, wants to do so at the expense of higher-income Americans. “I will not reduce the taxes paid by high-income Americans,” said Romney during the first presidential debate. “I will not reduce the share paid by high-income individuals,” he added, before maintaining in the second debate that “the top 5 percent of taxpayers will continue to pay 60 percent of the income tax the nation collects.”
Tax cuts may create jobs, stimulate entrepreneurship, raise GDP, boost investment, lead to economic growth, increase disposable income, strengthen the middle class, and stimulate the economy, but they are not the primary reasons that Republicans should propose and pursue tax cuts.
There are two important reasons that Republicans should be calling for ever-increasing tax cuts, tax deductions, tax credits, tax shelters, and tax exemptions — regardless of the economic benefits.
First, because taxation is government theft on a grand scale. As the late Austrian economist Murray Rothbard explained,
All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.
And second, because Americans have the natural right to the money they earn. As the contemporary Austrian economist Thomas DiLorenzo writes in his book Organized Crime: The Unvarnished Truth about Government, “The income tax effectively declares that all earned income is the property of the state, and that the state will inform us from time to time how much of our own income we may keep to live on by setting the income tax rates.”
The chief objection to abolishing the income tax and letting Americans keep the fruits of their labor — and one that is raised by Democrats and Republicans alike — is that the government “needs” the money. But since the vast majority of things the government spends money on are either immoral wealth-redistribution schemes and income-transfer programs or unconstitutional foreign wars and government programs (education, scientific and medical research, green initiatives, space exploration, public broadcasting, job training, the drug war, et cetera), it is apparent to all but Democratic and Republican supporters of the welfare/warfare/regulatory state that the government doesn’t really “need” the money after all.