Liberals and Taxes: The Big Question

Like many Americans who watched their savings nosedive in the market crash of '08, I've had to retrench, rethink and re-strategize my retirement plans.  One course I've considered is to spend less and save more.  The second is, somehow, to get a nickel for every time some Liberal said or wrote something like this:

The last time the top income tax rate was 39%, the United States enjoyed a booming economy, rising incomes, low unemployment and expanding budget surpluses.

Unfortunately, that simple truth has been ignored by Republican propagandists and mainstream media alike during the debate over President Obama's stimulus plan and budget proposal.

Well, there's certainly a lesson here for Obama and the Democrats, and for Republicans, too.  Surprisingly, it's the same lesson, and a lesson neither expects.

But first, a brief digression to dispel the Liberal claim that only "the rich" benefited from the Bush tax cuts:


Individual Income Tax Due in 2008,
Bush Law versus Clinton Law

For taxpayers who take the standard deduction and have no children

Taxpayer

Tax That Would Have Been Owed under Clinton-Era Tax Law

Tax Owed under Current Law, with Bush Tax Cuts

Single, income of 30,000

$3,157.50

$2,756.25

Single, income of 50,000

$7,262.50

$6,606.25

Married, income of $50,000

$5,085.00

$4,012.50

Married, income of $60,000

$6,585.00

$5,512.50

Single, income of $75,000

$14,262.50

$12,856.25

Married, income of $75,000

$9,426.50

$7,762.50

Single, income of $125,000*

$29,378.50

$26,472.25

Married, income of $125,000*

$23,426.50

$19,462.50

*This chart does not take into account the Alternative Minimum Tax

                       

Source:  The Tax Foundation


As the table shows, taxpayers in all income brackets paid less in taxes under Bush than under Clinton.  Now about those budget surpluses.  Here, courtesy of the Commerce Department's Bureau of Economic Analysis, is the record of annual federal tax receipts for the "Clinton surplus" years, 1998-2000, and for the years following, up to 2008.

Year

Receipts
(in billions of dollars)

1998

1,777.9

1999

1,895.0

2000

2,057.1

2001

2,020.3

2002

1,859.3

2003

1,885.1

2004

2,013.9

2005

2,290.1

2006

2,524.5

2007

2,660.8

2008

2,475.0


Note the amounts (in billions) for 1998, 1999 and 2000:  $1,777.9, $1,895.0 and $2,057.0, respectively.  But look, too, at the number for 2001:  $2,021.  What's so special about 2001?  That's the year in which the "Bush tax cuts" became law, when Bush signed the bill, on June 7, 2001.  But the bill did not become effective until the next year, 2002.  In 2001, when Bush was signing the new rates into law, America was still under the then-current Clinton rates -- and so, the $2.021 trillion the federal government collected in 2001, was collected under the old Clinton tax rates, not the new Bush rates.

Now compare 2001's receipts to 2000 and what do you see?  From 2000 to 2001, federal tax receipts declined under the Clinton tax rates.

Any Democrat who wants to blame the "Bush tax cuts" for the drops in tax receipts in 2002 and 2003, must first explain the drop that occurred in 2001 under the Clinton rates.

And then, when they've done that (if they can), they can explain the increases, in every year from 2004 through 2007, under the lower Bush tax rates.

Ah, but I digress, because we were talking about the "Clinton surpluses" or, to be more specific, the "Bush tax cuts'" supposed responsibility.  And here's where it where it really gets interesting, because, for the Democrats' argument that the "Bush tax cuts" caused the deficit to make sense, tax receipts during the Bush years would have to have been less than they were under Clinton's tax rates.  And indeed, tax receipts were less in some years, but not in others.  And beginning in 2004, under the lower Bush tax rates, receipts rose, for four years running, and in 2008, even after a decrease from 2007, stood at $2.475 trillion -- 22.5% higher than the highest year under the Clinton tax rates.

So tell us, Democrats, how could the Bush "tax cuts," under which total tax receipts increased, have erased the surplus and caused a deficit?

(By the way, I put "tax cuts" in quotes because, as we just saw, taxes, i.e., total receipts actually went up, so it actually was a Bush tax raise.  Bush did not cut taxes, he cut tax rates.)

Note also that three of the four budget-surplus years come after 1997, the year Clinton signed the bill Democrats seem to have forgotten, the Tax Relief Act of 1997, which lowered the capital gains tax rate, from 28% to 20%..

But if tax cuts did not cause the deficit, what did?  Do you really need to ask?  As always, the true culprit is spending.  Here are the amounts for 2001-2007 (the latest year for which I could find a hard number):

Fiscal Year

Total Government Expenditures
(in billions of dollars)

2001

2,986.9

2002

3,209.9

2003

3,415.0

2004

3,594.8

2005

3,854.1

2006

4,135.8

2007

4,321.3

                             

SourceThe Budget for Fiscal Year 2009, Historical Tables, Table 15.2, pg. 319.


This one's a no-brainer.  Note, first, that in every year, including 2001, 2002 and 2004, when federal receipts went down, federal expenditures went up.  Bad enough, but look also at the percentages.  In the period 2001-2007, federal receipts rose 31.7% ($2.0203 trillion to $2.6608 trillion), but federal expenditures rose 44.7% ($2.9869 trillion to $4.3213 trillion).  As I said, I don't have hard figures beyond 2007, but for both years, undoubtedly, spending will be up and tax receipts will be down.

The 53% of us who pay federal taxes are doing our part, sending Congress more of the fruits of our labors every year.  But for our representatives and senators (of both parties, sadly), what we send them is not enough.  It's the spending, stupid -- or, as I like to say, it's the stupid spending.  And for that, Congress, both Democrats and Republicans, get the blame.  Why did the Founding Fathers create three branches of government and a system of checks and balances if not for Congress to prevent the executive from spending unlimited amounts of money on whatever he wants?  Congress is supposed to put checks on the president, not write checks to the president, at least not blank ones.  Or so I thought.

But there's a bigger point, here, one that both parties miss, but more to the detriment of Republicans than Democrats.  Currently, the argument over taxes and surpluses revolves around the effects of changes in tax rates.  Republicans argue that tax rate increases "kill jobs," Democrats argue that they do not.  Democrats argue that raising taxes raises revenue, Republicans argue that it does not.  Conversely, Democrats argue that cutting tax rates reduces revenue and turns surpluses into deficits; Republicans argue that doing so does neither.

Both parties are right -- and wrong, for the actual numbers, including those in the tables above, taken in aggregate, demonstrate no relation between tax rates on the one hand, and tax receipts, jobs, economic growth, surpluses or deficits.  Indeed, a look at the entire history of U.S. tax receipts and federal expenditures, show deficits in years where tax rates were much higher than today, and surpluses in years before we had any income tax at all.

Now, the big question.  Armed with these facts, what should be the Republicans' strategy going forward?

First, Republicans should acknowledge the numbers and concede that we can have growth and prosperity, and the higher tax revenues that result therefrom, under tax rates higher, even significantly higher, than today's.  But, in the very next breath, Republicans should challenge Democrats to admit that we can have growth -- and increasing tax revenues -- with lower tax rates, including the Bush tax rates, too.  If Democrats balk, then Republicans should make sure that the American public sees the numbers. 

Then, challenge the Democrats to acknowledge that tax receipts -- even after 9/11, even in the midst of "the worst economic downturn since the Great Depression--were higher at the end of the Bush Administration (and under the Bush tax rates) than at the end of the Clinton Administration (under the higher Clinton tax rates) and thus, as a matter of simple logic, the Bush tax cuts could not possibly be responsible for the deficit.  Indeed, had Congress acted responsibly and controlled spending, had Congress still increased spending, but increased it below the rate at which tax revenues were increasing, the budget surplus would still be very much with us.  And again, if Democrats balk, then Republicans should show the American people the numbers.

Then, based on the record and the numbers, Republicans should point out the obvious:  Though Congress can decide to raise tax rates, and determine what those rates will be, Congress cannot predict how much revenue will be raised or even whether any revenues will be raised at all.  But we do know, and can see in the current revenue numbers, the economy's strength is very much a key factor in determining tax revenues.  In other words, Republicans should argue, if Democrats want more tax revenues to spend, the only sure way to do so is to work with Republicans to enact and promote pro-growth fiscal policies.  Simply raising tax rates will not do the trick, and imposing new, costly mandates, such as Cap and Trade, national health care and environmental regulations up the wazoo, will make things even worse.

And finally,  Republicans should do what they've never done:  raise the moral issue.  In calling for higher taxes, Democrats cite two reasons.  One is their desire to raise revenues to do all the things Democrats want to do.  But as we've seen, we can get higher tax revenues under lower tax rates just as well as (and, some would say, better than) we can under higher tax rates.

The other reason Democrats cite is to "make the wealthy rich pay their fair share."  But numerous studies have shown that as tax rates have gone down, the percentage of taxes paid by "the wealthy" goes up.

Clearly the federal government can increase its tax revenue with either lower, or higher, rates and, thus, as far as the goal or raising revenue is concerned, the choice of tax rates, within reason (obviously, with a tax rate of zero, we get zero revenues), is totally arbitrary.  That being the case, Republicans can ask the Big Moral Question:  If we can increase revenues with both lower and higher rates, why is it not better to increase them with lower rates?  And if our goal is to "make the wealthy pay their fair share" and the share of taxes paid by the wealthy increases under lower rates, why do Democrats continually advocate higher rates?

The answer is so obvious, I need not state it.  But the Democratic Party and every Democrat who advocates higher tax rates should be made to do so, and publicly.

 ####

Like many Americans who watched their savings nosedive in the market crash of '08, I've had to retrench, rethink and re-strategize my retirement plans.  One course I've considered is to spend less and save more.  The second is, somehow, to get a nickel for every time some Liberal said or wrote something like this:

The last time the top income tax rate was 39%, the United States enjoyed a booming economy, rising incomes, low unemployment and expanding budget surpluses.

Unfortunately, that simple truth has been ignored by Republican propagandists and mainstream media alike during the debate over President Obama's stimulus plan and budget proposal.

Well, there's certainly a lesson here for Obama and the Democrats, and for Republicans, too.  Surprisingly, it's the same lesson, and a lesson neither expects.

But first, a brief digression to dispel the Liberal claim that only "the rich" benefited from the Bush tax cuts:


Individual Income Tax Due in 2008,
Bush Law versus Clinton Law

For taxpayers who take the standard deduction and have no children

Taxpayer

Tax That Would Have Been Owed under Clinton-Era Tax Law

Tax Owed under Current Law, with Bush Tax Cuts

Single, income of 30,000

$3,157.50

$2,756.25

Single, income of 50,000

$7,262.50

$6,606.25

Married, income of $50,000

$5,085.00

$4,012.50

Married, income of $60,000

$6,585.00

$5,512.50

Single, income of $75,000

$14,262.50

$12,856.25

Married, income of $75,000

$9,426.50

$7,762.50

Single, income of $125,000*

$29,378.50

$26,472.25

Married, income of $125,000*

$23,426.50

$19,462.50

*This chart does not take into account the Alternative Minimum Tax

                       

Source:  The Tax Foundation


As the table shows, taxpayers in all income brackets paid less in taxes under Bush than under Clinton.  Now about those budget surpluses.  Here, courtesy of the Commerce Department's Bureau of Economic Analysis, is the record of annual federal tax receipts for the "Clinton surplus" years, 1998-2000, and for the years following, up to 2008.

Year

Receipts
(in billions of dollars)

1998

1,777.9

1999

1,895.0

2000

2,057.1

2001

2,020.3

2002

1,859.3

2003

1,885.1

2004

2,013.9

2005

2,290.1

2006

2,524.5

2007

2,660.8

2008

2,475.0


Note the amounts (in billions) for 1998, 1999 and 2000:  $1,777.9, $1,895.0 and $2,057.0, respectively.  But look, too, at the number for 2001:  $2,021.  What's so special about 2001?  That's the year in which the "Bush tax cuts" became law, when Bush signed the bill, on June 7, 2001.  But the bill did not become effective until the next year, 2002.  In 2001, when Bush was signing the new rates into law, America was still under the then-current Clinton rates -- and so, the $2.021 trillion the federal government collected in 2001, was collected under the old Clinton tax rates, not the new Bush rates.

Now compare 2001's receipts to 2000 and what do you see?  From 2000 to 2001, federal tax receipts declined under the Clinton tax rates.

Any Democrat who wants to blame the "Bush tax cuts" for the drops in tax receipts in 2002 and 2003, must first explain the drop that occurred in 2001 under the Clinton rates.

And then, when they've done that (if they can), they can explain the increases, in every year from 2004 through 2007, under the lower Bush tax rates.

Ah, but I digress, because we were talking about the "Clinton surpluses" or, to be more specific, the "Bush tax cuts'" supposed responsibility.  And here's where it where it really gets interesting, because, for the Democrats' argument that the "Bush tax cuts" caused the deficit to make sense, tax receipts during the Bush years would have to have been less than they were under Clinton's tax rates.  And indeed, tax receipts were less in some years, but not in others.  And beginning in 2004, under the lower Bush tax rates, receipts rose, for four years running, and in 2008, even after a decrease from 2007, stood at $2.475 trillion -- 22.5% higher than the highest year under the Clinton tax rates.

So tell us, Democrats, how could the Bush "tax cuts," under which total tax receipts increased, have erased the surplus and caused a deficit?

(By the way, I put "tax cuts" in quotes because, as we just saw, taxes, i.e., total receipts actually went up, so it actually was a Bush tax raise.  Bush did not cut taxes, he cut tax rates.)

Note also that three of the four budget-surplus years come after 1997, the year Clinton signed the bill Democrats seem to have forgotten, the Tax Relief Act of 1997, which lowered the capital gains tax rate, from 28% to 20%..

But if tax cuts did not cause the deficit, what did?  Do you really need to ask?  As always, the true culprit is spending.  Here are the amounts for 2001-2007 (the latest year for which I could find a hard number):

Fiscal Year

Total Government Expenditures
(in billions of dollars)

2001

2,986.9

2002

3,209.9

2003

3,415.0

2004

3,594.8

2005

3,854.1

2006

4,135.8

2007

4,321.3

                             

SourceThe Budget for Fiscal Year 2009, Historical Tables, Table 15.2, pg. 319.


This one's a no-brainer.  Note, first, that in every year, including 2001, 2002 and 2004, when federal receipts went down, federal expenditures went up.  Bad enough, but look also at the percentages.  In the period 2001-2007, federal receipts rose 31.7% ($2.0203 trillion to $2.6608 trillion), but federal expenditures rose 44.7% ($2.9869 trillion to $4.3213 trillion).  As I said, I don't have hard figures beyond 2007, but for both years, undoubtedly, spending will be up and tax receipts will be down.

The 53% of us who pay federal taxes are doing our part, sending Congress more of the fruits of our labors every year.  But for our representatives and senators (of both parties, sadly), what we send them is not enough.  It's the spending, stupid -- or, as I like to say, it's the stupid spending.  And for that, Congress, both Democrats and Republicans, get the blame.  Why did the Founding Fathers create three branches of government and a system of checks and balances if not for Congress to prevent the executive from spending unlimited amounts of money on whatever he wants?  Congress is supposed to put checks on the president, not write checks to the president, at least not blank ones.  Or so I thought.

But there's a bigger point, here, one that both parties miss, but more to the detriment of Republicans than Democrats.  Currently, the argument over taxes and surpluses revolves around the effects of changes in tax rates.  Republicans argue that tax rate increases "kill jobs," Democrats argue that they do not.  Democrats argue that raising taxes raises revenue, Republicans argue that it does not.  Conversely, Democrats argue that cutting tax rates reduces revenue and turns surpluses into deficits; Republicans argue that doing so does neither.

Both parties are right -- and wrong, for the actual numbers, including those in the tables above, taken in aggregate, demonstrate no relation between tax rates on the one hand, and tax receipts, jobs, economic growth, surpluses or deficits.  Indeed, a look at the entire history of U.S. tax receipts and federal expenditures, show deficits in years where tax rates were much higher than today, and surpluses in years before we had any income tax at all.

Now, the big question.  Armed with these facts, what should be the Republicans' strategy going forward?

First, Republicans should acknowledge the numbers and concede that we can have growth and prosperity, and the higher tax revenues that result therefrom, under tax rates higher, even significantly higher, than today's.  But, in the very next breath, Republicans should challenge Democrats to admit that we can have growth -- and increasing tax revenues -- with lower tax rates, including the Bush tax rates, too.  If Democrats balk, then Republicans should make sure that the American public sees the numbers. 

Then, challenge the Democrats to acknowledge that tax receipts -- even after 9/11, even in the midst of "the worst economic downturn since the Great Depression--were higher at the end of the Bush Administration (and under the Bush tax rates) than at the end of the Clinton Administration (under the higher Clinton tax rates) and thus, as a matter of simple logic, the Bush tax cuts could not possibly be responsible for the deficit.  Indeed, had Congress acted responsibly and controlled spending, had Congress still increased spending, but increased it below the rate at which tax revenues were increasing, the budget surplus would still be very much with us.  And again, if Democrats balk, then Republicans should show the American people the numbers.

Then, based on the record and the numbers, Republicans should point out the obvious:  Though Congress can decide to raise tax rates, and determine what those rates will be, Congress cannot predict how much revenue will be raised or even whether any revenues will be raised at all.  But we do know, and can see in the current revenue numbers, the economy's strength is very much a key factor in determining tax revenues.  In other words, Republicans should argue, if Democrats want more tax revenues to spend, the only sure way to do so is to work with Republicans to enact and promote pro-growth fiscal policies.  Simply raising tax rates will not do the trick, and imposing new, costly mandates, such as Cap and Trade, national health care and environmental regulations up the wazoo, will make things even worse.

And finally,  Republicans should do what they've never done:  raise the moral issue.  In calling for higher taxes, Democrats cite two reasons.  One is their desire to raise revenues to do all the things Democrats want to do.  But as we've seen, we can get higher tax revenues under lower tax rates just as well as (and, some would say, better than) we can under higher tax rates.

The other reason Democrats cite is to "make the wealthy rich pay their fair share."  But numerous studies have shown that as tax rates have gone down, the percentage of taxes paid by "the wealthy" goes up.

Clearly the federal government can increase its tax revenue with either lower, or higher, rates and, thus, as far as the goal or raising revenue is concerned, the choice of tax rates, within reason (obviously, with a tax rate of zero, we get zero revenues), is totally arbitrary.  That being the case, Republicans can ask the Big Moral Question:  If we can increase revenues with both lower and higher rates, why is it not better to increase them with lower rates?  And if our goal is to "make the wealthy pay their fair share" and the share of taxes paid by the wealthy increases under lower rates, why do Democrats continually advocate higher rates?

The answer is so obvious, I need not state it.  But the Democratic Party and every Democrat who advocates higher tax rates should be made to do so, and publicly.

 ####