'Soak the Rich'

Arthur Bruzzone

November 2007

SAN FRANCISCO, Ca --- Rep. Charlie Rangle (D-MI) is man on a mission.  Just below his calls for higher taxes is a familiar refrain --- 'soak the rich.'  Unfortunately for GOP lawmakers, the much publicized luxury lifestyle of hedge fund managers fits neatly into Rangle's and the Democrats' plans.  Billion dollar salaries, extravagance beyond comprehension - one fund manager owns 26 luxury yachts berthed in New York harbor.

The two major parties have been morphing into each other. For example, they've both shown they're addicted to earmarks. That's about to change.  Tax policy will force the parties to part ways.  That is, if the Republicans know what's good for them.

In 2010, the estate tax is scheduled to end, and President Bush's tax cuts are set to end a year later.  The Democrats see this as opportunity to finance a host of social programs, with health care at the top of the list. Secretly, many Democrats long for the days when the top marginal tax rate was 90%;  Republican Dwight Eisenhower was president then.

But consider the facts. The rich still pay the bulk of Federal taxes.

From recent tax returns, the top one percent of filers pay 40% of all income taxes, up from 36% a year ago. The top five percent pay 60% of all taxes, even when earning just $143,000. Finally, the top ten percent of all filers pay 70% of all taxes, earning just $100,000.  That last group consists of millions of small business owners. At the same time, the bottom 50% of filers pay just three percent of total tax revenue. 

But the Democrats are not satisfied. 

Under current Democrat proposals, the Alternative Minimum Tax would be eliminated, standard deductions would rise, earned income credits would be expanded to childless taxpayers, and child tax credits for lower-incomers would be increased.   The so-called 'rich' would finance these changes.  The Democrats are proposing a surcharge of four percent on incomes over $150,000.  Capital gains taxes would rise from 15 to nearly 20 percent. As expected, hedge fund managers would find their earnings treated as ordinary income, not capital gains, with a maximum tax rate of 44 percent with the surcharge.  With state taxes and self - employment taxes, many entrepreneurs would see their overall tax rate break through the 65% barrier. 

If the Democrats want more tax dollars to waste, they should consider the impact of lowering taxes - the Heritage Foundation has documented the results of doing so. Tax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1.16 billion in 1928, an increase of more than 61 percent.

President Kennedy's across-the-board tax rate reductions lowered the top tax rate from more than 90 percent down to 70 percent. Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).

President Reagan proposed sweeping tax rate reductions during the 1980s. Total tax revenues climbed by 99 percent during the 1980s.  Once the economy received a tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

The Bush tax cuts have shown the same results.  Federal tax receipts have increased by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, the government took in 6.7% more tax revenues than in 2006.  These increases in tax revenue have substantially reduced the federal budget deficit. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Still the Democrats are not convinced.  The 2008 presidential race should be a debate about taxes and government's use of the revenues, as much as about the war against terrorists and hot button social issues. The GOP has the edge when it comes to taxes, if they keep history in mind.   It could be the key issue that will decide tight races in several states. Let's hope Republicans have learned from history--- when the Democrats cried openly to 'soak the rich'.

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