December 21, 2010
The Rich Who Laid the Golden EggsBy Bill Costello
"The Goose That Laid the Golden Egg," a fable by Aesop, provides a moral lesson about greed. A couple owned a goose that laid a golden egg every day. Assuming there must be a big lump of gold inside the goose, the couple killed it. But they found no gold. By trying to get all of the gold at once, the couple deprived themselves of gold they would have otherwise received every day. In modern America, the rich are like the goose, and the couple is like the government.
To get all it can out of the "rich," the government uses a progressive federal income tax. The top 1 percent of American wage earners pay 40 percent of the total income taxes collected by the federal government. The top 5 percent pay 60 percent, the top 10 percent pay 70 percent, and the top 50 percent pay 97 percent. That means that the bottom 50 percent pay only 3 percent.
And that's just among those who actually pay income taxes. Nearly 50 percent of Americans pay none at all.
There are 1.4 million taxpayers in the top 1 percent and 134 million taxpayers in the bottom 95 percent. The top 1.5 million people actually pay a larger share of the income tax burden than the bottom 134 million people combined.
The burden of taxes has increasingly been shifting to a smaller and smaller percentage of the population. America now has the most progressive income tax system among nations that belong to the Organization for Economic Cooperation and Development. In America, the "rich" pay a larger share of taxes than in any of those nations, and the poor pay a smaller share.
America did not always have an income tax. One was proposed during the War of 1812, but never enacted. America's first income tax came during the Civil War. It was repealed in 1872. A decade later, the Supreme Court concluded that income tax was unconstitutional. After another decade and a half, they reversed their decision. America's second income tax came in 1894 but ended shortly thereafter, when the court decided again that it was unconstitutional.
It wasn't until 1909 -- when President Taft proposed a constitutional amendment to avoid conflict with the Supreme Court -- that our current income tax system began to take shape. In 1913, the Sixteenth Amendment became part of the Constitution, and income tax was applied only to the richest 1 percent of Americans.
Who are the so-called rich? For the last two years, they have been defined by an arbitrary annual income of $250,000 and up.
But is annual income a good measure of how rich someone is? If Bill Gates earned zero income this year, would he still be rich? Of course. Because he has accumulated billions over the years.
Just because a family earns an annual income over $250,000 does not mean that its members are rich. It means just that they did well during a particular year. Income levels vary from year to year. Some people work for decades in the lower brackets until their hard work pays off and they get to enjoy a few years in the upper brackets. Most are not millionaires or billionaires. That these people have to pay extra taxes at the point when their higher incomes compensate them for years of sacrifice is despotic.
The real millionaires and billionaires are not very concerned about income tax rates because income taxes cannot touch their accumulated wealth. It is protected by tax shelters.
Despite the facts, the government still typically views the reduction of income tax rates as "tax cuts for the rich" instead of what it really is: tax cuts for the economy. It's a concept the government repeatedly fails to grasp.
It has been proven time and time again that reducing income tax rates increases tax revenues. When President Calvin Coolidge reduced income tax rates, the government collected more money in taxes. The same thing happened under Presidents John F. Kennedy, Ronald Reagan, and George W. Bush.
How is it possible that reducing income tax rates increases tax revenues?
Because when income tax rates are high, many people put their money in tax shelters to avoid paying taxes. People are also less likely to put in extra time at work, hire new employees, or invest in new equipment when they know that most of their additional income will be eaten up in taxes.
When income tax rates are low, people remove their money from tax shelters to invest in the economy, where they can make more money. As a result, more people actually pay taxes, more jobs are created, output increases, incomes rise, and the government collects more money in taxes.
Like the couple whose short-sighted greed prevented them from maximizing profit from the goose, the government's short-sighted greed often deprives the nation at large from maximizing tax revenues and improving the economy.
Bill Costello, M.Ed., is the president of U.S.-based Making Minds Matter, LLC and the author of Awaken Your Birdbrain: Using Creativity to Get What You Want. He can be reached at www.makingmindsmatter.com.