Do Higher Taxes Raise More Money? (What about them Bush Tax Cuts?)
Here’s a brain game for you: Before reading this article, watch this short video and see if you can figure out on your own why the narrator, who pretends to be an honest broker of pure mathematical fact, is completely wrong and dishonest in the claim he makes at the end of the video. This man’s disingenuous presentation of the Laffer Curve is no laughing matter.
(No fair reading first 😉 )
While the person in the video suggests a Republican solution of decreasing tax rates on the rich in order to raise revenue, he commits the intentional falsehood that so many Republicans have been committing, which is to ignore one very simple fact: The rich do not make their money off of paychecks. They do not make the bulk of their money in the category that pays income tax. So, higher taxes on income are not going to affect them much anyway.
Why higher taxes on income do not affect the rich at all
The rich make the bulk of their money buying and selling stocks and buying and selling real property and businesses, and from stock dividends. Everything listed there, except dividends, is taxed under capital gains tax, which, thanks to the Bush Tax Cuts, has the lowest rate in our tax system. But guess what? Dividends are also taxed at this same lowest rate under the Bush Tax Cuts. In other words, therefore, all of the main forms of income the rich make are specially protected under the same low rates the very poor pay. So, if the guy narrating this video were an honest broker, he’d say, “The math suggests that we should actually double the capital gains tax and dividend tax if we want to maximize revenue from the rich.”
Capital gains and stock dividends are only taxed at 15%, which is equal to the lowest bracket of income tax scheduled for 2013. Moreover, the rich can offset that income by carrying over losses from the previous year. The poor almost never have that option.
That’s why the rich love our tax code as it is, and have been doing every maneuver possible to avoid ending the Bush Tax Cuts. The Bush Tax Cuts made it appear that the poor were getting most of the break, but the Bush Tax Cuts directed huge cuts toward capital gains and stock dividends — the ballpark where the rich play. The income tax code implies to most onlookers that the rich pay 38.5% on their top income, more than their fair share; but that’s all smoke and mirrors. The rich all know that they never pay that rate on their overall income, but only on a small fraction of it — often on none of it. Most of the public is apparently oblivious to the fact that the rich make most of their income from capital gains and stock dividends, which have their own special little arena to play in. THAT’S why Romney only pays 14% of his income in tax (right alongside with this nation’s poorest individuals). Not only is most of his income only taxed at 15% as capital gains, he has exclusions and credits that are only available to the wealthy to reduce his taxes even further. At the end of the day, he can actually wind up paying less than what the nation’s poor pay.
What a rigged game, huh?
Yet, Republican voters are all for giving the rich this kind of tax welfare. Why? Because they believe someday they’ll be rich, and they want to make sure they don’t have to pay higher taxes when that magic day comes. They’re protecting a fantasy. The great unwashed are oblivious to the fact that most money made by the rich is not taxed under income tax brackets like theirs is. They have also bought into the delusion that giving these breaks to the rich will enable the rich to help us them out by building more factories to create more jobs. Never mind that more than a decade of the Bush Tax Cuts has left us in the worst job situation since the Great Depression. (And if you believe unemployment has come down, just note that it only started coming down as the extended unemployment benefits were cut toward the end of this past summer. Those who no longer receive unemployment benefits, are no longer counted among the unemployed. Never mind that they did not get a job. Another game of smoke and mirrors.) And never mind that the factories they created were all in China and India and Mexico.
According to the Laffer curve, the law of diminishing returns means there is a point where higher taxes cause an drop in revenue. That much is true. Even IF the two economists mentioned in this video are right about 33% being the point on the curve, then capital gains tax needs to more than double. And, if you do that, guess what you have? The Clinton capital gains tax rates before George Bush became president and stabbed the economy in the gut. Then consider that these two economists are on the low side of all their peers as to where the Laffer Curve really crests. So, doubling the capital gains tax is the minimum we should do in establishing higher taxes for the rich, while keeping taxes where they are for the middle class. We should, in the very least, make the rich pay the same amount on capital gains and dividends that all the rest of us pay on our income. The revenue increase would be huge because capital gains is nowhere near the top of the Laffer Curve.