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Crafty_Dog
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« on: December 26, 2007, 07:28:10 AM »

This could easily have gone in the Poltical Economics thread, but given the profound importance of tax policy in its own right, I give it its own thread.

====================

WSJ

FairTax Facts
By LEO LINBECK
December 26, 2007; Page A10

Much has been written lately about the FairTax, the proposal to replace the current federal income tax with a national retail sales tax. Unfortunately, much of it is wrong.

This country needs a spirited and wide-ranging debate about fundamental tax reform. But that debate is not advanced by misimpressions and distortions of the FairTax. Let us then clear up a few.

One assertion about the FairTax is that it began as a project of the Church of Scientology at a time when it was seeking tax-exempt status. This is false. The FairTax actually comes to us from market research conducted more than a decade ago by a handful of business leaders. Their goal was to determine what type of tax system would be most acceptable to the American public. The studies they paid for cost millions of dollars, included hard economic research by respected scholars, and were subjected to critical peer review. The result is a proposal, since introduced as legislation in Congress, now known as the FairTax.

What emerged from this research is that a national retail sales tax is a preferred method of taxation among most Americans surveyed. Another is that the tax would have significant benefits for the nation's economy.

Why? Because it eliminates income taxes and payroll taxes (for Social Security and Medicare), which are costly to collect and end up as "embedded" in the price of everything we buy. Along with getting rid of the Internal Revenue Service and the complexities of the income tax code, the FairTax would eliminate the distorting effect that income and payroll taxes have on the economy.

Research on the price of consumer goods reveals that up to 20% of all prices today represent hidden income taxes and payroll taxes. Once these taxes are repealed and replaced with the FairTax, it is likely that market pressure would force retail prices to fall.

Eliminating embedded taxes will also do something else -- it will remove significant price disadvantages suffered by American producers competing with tax-free imports. Eliminating corporate income taxes and capital gains taxes, which the FairTax would do, would likely make the American economy the most desirable place in the world to do business.

Another benefit of the FairTax is that, unlike other sales taxes, it would not hit the poorest Americans the hardest. The FairTax proposal calls for sending every American a "prebate" check to offset the cost of the national sales taxes paid by those living in poverty. This feature would effectively exempt those living below the poverty line from paying taxes to the federal government, and provide all taxpayers with a reimbursement of a portion of taxes paid.

The FairTax rate is 23% on retail sales when calculated "inclusively," as are income tax rates. It will, in a fairer, more transparent and less-expensive way, raise the same amount of money the federal government now collects through the income and payroll taxes. Because it would be levied on consumption at the final point of sale, instead of on earnings, it would dramatically expand the tax base. The FairTax would collect revenue from the underground economy. Even illegal immigrants and the 40 million foreign tourists who visit the U.S. each year would pay it.

The distributional effects of the FairTax have been extensively studied, and although the proposal has distinct advantages for investors and wealth creation across the income spectrum, the greatest benefit of the FairTax is to low- and moderate-income Americans. The effect of eliminating regressive payroll taxes is commonly overlooked when analyzing the FairTax, but it would have a very significant impact, as these taxes represent the single largest tax burden on these income earners.

Significantly, the FairTax eliminates all loopholes, gimmicks, exemptions and deductions from the federal tax system. Under the FairTax, Congress would no longer be able to reward friends, punish enemies or manipulate behavior through the tax code. The FairTax would also eliminate the lucrative tax lobbying practices that represent more than 50% of all lobby dollars spent annually in Washington.

It's no surprise, then, to see that vested interests have argued against the FairTax and in favor of keeping the mortgage interest deduction. But wouldn't it be better for everyone to stop the IRS from withholding from paychecks; to see the price of new homes -- and all other goods -- drop by removing embedded costs; and to have interest rates fall as the savings rate increases? Is it really in everyone's interests to keep the income-tax system so that one-third of taxpayers can go on deducting a portion of their mortgage interest from their federal taxes?

There have been many tax reform proposals over the years, but most of them simply call for reforming around the margins of the existing tax system. The President's Advisory Panel on Tax Reform was assembled by the Bush administration and concluded its work a few years ago. Instead of seriously looking at the FairTax, the panel looked at a very different type of consumption tax, riddled with exemptions, and then declared that it would be too expensive and that the rate would have to be far higher than the FairTax rate.

Politically, the FairTax will only become law once enough citizens demand that it be enacted, overcoming the self-interest that members of Congress and others have in holding onto the current system. It is debatable whether a modern, citizen-led tax revolution is possible. But the growing popularity (even among presidential candidates) of the FairTax suggests that another Boston Tea Party may be at hand.

Mr. Linbeck is CEO and cofounder of Americans for Fair Taxation.
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DougMacG
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« Reply #1 on: December 27, 2007, 07:40:23 AM »

My top ten reasons that the 'FairTax' is a non-starter.  IMHO you can stop reading after the first sentence of point 1) below which constitutes a total and complete show-stopper.

1) Changing over to the 'FairTax' requires the repeal of the 16th amendment. You will not see 2/3rds of Nancy Pelosi's House, 2/3rds of Harry Reid's Senate and 3/4ths of the legislatures, including states like Senator Amy Klobuchar's Minnesota and Senator Hillary clinton's New York, voting to 'permanently' cancel the authority of the federal government to tax income at all while their careers are fully focused on "raising taxes on the wealthiest among us" to pay for health care and more government of all kinds.

Perhaps Mike Huckabee or a liberal (redundant?) would create a new layer of federal taxation without eradicating the old one, but then I would consider supporting a 'well regulated Militia' to dissuade him.

2)  A 23% "inclusive" tax is a 30% sales tax in American English.  When you buy a $1 item you pay $1.30.  Do the math!

3) Unless you live in South Dakota or other location without a state income tax you will still need to file a complete income tax return including all of the schedules with the government every year.  (Who really thinks the states will soon quit taxing income.)

4) Somewhere approaching 40% of the economy are the government purchases.  You can make them FairTax-exempt and then adjust the 30% tax upward for the rest of us, or you can assume they are not exempt and adjust our spending-neutral needs proportionately upward for revenue requirements to buy the same amount of government purchases which will similarly bump up the tax rate to citizens beyond affordability.

5)  The so-called "prebates" that remove the harshness of sales tax regressivity also remove the simplicity which was the primary strength, purpose and justification for the 'Fair Tax'.

6)  New items are taxed and used items are not taxed again because they already were, yet 'used' homes will be taxed!  Unbelievable.  Again, there goes the simplicity and the lobbying as it means all rules are negotiable.

7)  Fairness? For whom? Those who worked hard, paid taxes and saved for the future and now want to enjoy it will be openly double taxed.  So much for fairness.  Again, if we adjust for fairness, out goes the simplicity.

8.) What kind of real tax reform  is revenue neutral?  Those who want reform generally want lower tax burdens.  Those who preach the populist 'tax the rich' message of today are diametrically opposed to the efforts to lower or remove the burdensome taxes on production.

9)  The false promise of ending taxation on income has split and damaged the already feeble movement to truly reform our massive, incomprehensible tax system.  Case in point, look at the GOP contest in Iowa that will spread from there.  The already thin minority of Iowans who are inclined to be a) caucus-goers, b) fiscal conservatives and c) have a tax reform orientation are now distracted away from the difficult to elect conservatives like Fred Thompson, who has a serious income tax reform proposal, toward the impossible to elect Mike Huckabee who is not even a fiscal conservative and just recently co-opted the 'FairTax ' banner.  IMO that means certain defeat for the larger cause of simplifying and lessening the burden.

10)  The nomenclatures and slogans of "FairTax"  and "revenue neutral" are bogus.  They sound like they originate from the same public relations firm that informed us that taxes are mere "contributions".  Changing to consumption-based taxation is not fairer, it is just different.  It is not revenue-neutral to the individual taxpayers.  It would shift burdens around and half the people would certainly cry out 'unfair!'.  But they won't need to because it is impossible to implement this total system changeover. Please see no. 1) above. 

Bonus, 11)  A national 30% sales tax would compete and worden the state and local sales taxes that are often as high as 7% or more.  States and localities would then shift taxation heavier toward the income side, potentially removing most or all gains after adding an enormous new layer.  Imagine your local public schools looking at all that new revenue potential.  Nothing in the federal constitution or future amendments removes the ability of the state, county, local, school, or waste, stadium or transit commissions to go after any revenues that the feds leave on the table. 

Who among us really believes a new tax will solve our problems. As you may have guessed, not me.   - Doug
« Last Edit: December 27, 2007, 01:51:34 PM by DougMacG » Logged
Crafty_Dog
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« Reply #2 on: January 07, 2008, 11:16:14 AM »

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A Supply-Side World
January 7, 2008; Page A12
Democrats in Congress remain committed to raising taxes on grounds that tax rates don't much matter to economic growth, and in any case they only help the rich. They may be the last public officials on the planet to believe this. In recent weeks alone, some of the unlikeliest political leaders have endorsed tax rate cuts in the name of making their economies better.

Start in Europe, where Socialist Party Prime Minister José Luis Rodríguez Zapatero pledged in December that if re-elected, "One of the first decisions I would take is to eliminate the wealth tax [up to 2.5%]," which he says is one of the highest in Europe and "punishes savings." Mr. Zapatero is no conservative. But he's joining the European march down the Laffer Curve on taxes, having already phased in reductions in Spain's corporate tax rate to 30% from 35% and its personal income tax rate to 43% from 45%.

Like France and Germany, Spain is cutting rates because of the tax competition from their European Union neighbors such as Ireland and East Europe. There are now at least 11 nations formerly behind the Iron Curtain with flat rate taxes of 25% or lower. On January 1, a new flat tax of 10% became law in Bulgaria, replacing its progressive rate structure and as far as we know the lowest such rate in the world. The newly elected Polish parliament is also planning to cut taxes, though an earlier flat-tax proposal earned a veto threat from the president.

And this just in: In the Middle East, Kuwait has decided to slash its corporate income tax on foreign companies to 15% from 55%. Finance Minister Mostafa al-Shemali argued for the cut, noting that Kuwait attracted less than $300 million in foreign investment last year, compared to some $18 billion in lower-tax Saudi Arabia (which has a religious tax but no corporate or income tax on Saudi nationals). "This law will encourage foreign investors to enter Kuwait," says Ahmed Baqer, head of the parliament's finance panel.

It's getting lonelier all the time at the top for America, which with a corporate tax rate of 35% is one of the few developed nations left with a rate of more than 30%. Economist Dan Mitchell tracks these trends for the Cato Institute, and he finds that 26 developed nations have cut either personal or corporate income tax rates since 2005. Since 1980, OECD nations have sliced their average personal income tax rate by 24 percentage points, to 40% from 64%. Corporate tax rates have fallen by more than 20 percentage points. Foreign leaders have learned that, in a world of easy global capital flows, high tax rates chase away investment and entrepreneurs.

Some of these tax-cutting nations -- such as Estonia, Ireland, Russia and Spain -- have seen revenues rise even as rates have fallen. This is what turns socialists into supply-siders in Spain, if regrettably not in the U.S.

WSJ
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Crafty_Dog
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« Reply #3 on: January 08, 2008, 12:25:38 PM »

I like the FAIR tax idea a lot in theory-- but here's an attack on it:

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FairTax Flaws
By JERRY BOWYER
January 8, 2008; Page A20

If talk show hosts ran the world, we'd have a national sales tax. We'd have no immigration, and we would have long ago carpet-bombed the entire Middle East. We'd also have something called "fair trade," which means no real trade at all.

But they don't run the world; they just pretend that if they did, everything would be great. I would be a lot more confident that this was true if I didn't know so many talk show hosts. I would be even more confident if they had really run anything of consequence before. But I do, and they haven't.

I mention this because last week Mike Huckabee won the Iowa caucus partly on a movement incubated in large part on radio talk shows: the FairTax. If words were deeds, then life would be great. We could simply declare that by switching from a federal income tax to a national retail sales tax, tax cheating would end, code complexity would be a thing of the past, and illegal immigrants would start paying taxes. And, of course, we'd switch into high economic growth -- forever.

The problem is that none of this would happen. People would simply switch from cheating on income taxes to cheating on sales taxes.

Small vendors often fail to withhold sales taxes. Buyers cheat on sales taxes now. They often fail to pay taxes on interstate catalogue sales. They buy some goods in black markets.

This doesn't happen much because sales taxes are much lower than income taxes, but if that were reversed, consumers would cheat more. Look at cigarettes. Organized crime sells smokes on the black market in jurisdictions that impose high cigarette taxes.

There is a large category of economic activity designed to avoid sales taxes -- it's called smuggling. We don't hear that word much anymore, because we're not a sales-tax or tariff-based system anymore. Increase sales taxes to a combined state and federal 30%, up from a state-based 6% now, and watch the dodging begin.

The immigrant stuff is nonsense on stilts. Let me ask you this: If they're here illegally, why won't they also buy and sell goods on the black market?

Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.

And what about business transactions? If you tax business-to-business transactions, then you'll set off a wave of corporate consolidation. Instead of buying from a supplier at a 30% markup, I'll just buy my supplier and be tax free. And what about financial firms like Goldman Sachs, which spend most of their money on payroll and investments, and very little on goods and services? Goldman will pay taxes on what? Paper clips?

If, on the other hand, we institute the most widely supported version of the national sales tax, then business transactions are to be exempted. In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

And what about transition rules? There are millions of transactions that are, at any given moment, occurring over an extended time. The most obvious example is retirement. I defer taxes now, for retirement later. So I make a decision based on an income-tax regime that doesn't make any sense in a sales-tax regime. Do I get my money back? What about Roth IRAs? I pay income taxes on the money now, and then pay again later when I spend it during retirement? Double taxation isn't really a "fair" tax, is it?

These are the easy-to-see cases, but what about the incredible variety of tax questions raised by installment sales? Inventory accounting? Wholesale purchases? Ebay?

None of this matters anyway. We will never make this change. The 16th Amendment will not be repealed in favor of a tax vigorously opposed by an army of restaurants, pubs and retail stores. It's hard to get good ideas through the ratification process; imagine how hard it would be to push this stinker. In point of fact, the FairTax serves one main purpose right now: It gives Mr. Huckabee the chance to sum up his economic plan in one line. And that just doesn't seem, well, fair.

Mr. Bowyer is chief economist of BenchMark Financial Network and a CNBC contributor.
 
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Crafty_Dog
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« Reply #4 on: January 24, 2008, 03:56:43 PM »

THE CASE FOR THE CANDIDATE
The Giuliani Tax Cut
By STEVE FORBES
January 24, 2008; Page A16

There is a lot of talk about change in this year's presidential race. But if Washington is truly broken, as many Americans think it is, then it doesn't merely need to be changed. It needs to be fixed. And the man who fixed up New York is ready to fix up Washington.

Rudy Giuliani has proposed the largest tax cut in modern American history and a dramatic simplification of the tax code. His proposal has received broad support from fiscal conservatives in Washington; yesterday it was introduced as legislation by Reps. David Dreier and Roy Blunt, and by Sen. Christopher Bond. Since Fred Thompson has dropped out of the race, there's no question which candidate offers the best tax plan, or is the best spokesman for advancing the tax-reform cause.

Mr. Giuliani's proposal is a remedy for a quintessentially Washingtonian problem: bloated bureaucracy. When the income tax was introduced in 1913, Congress adopted a one-page filing form and a maximum rate of 7%. The Office of Management and Budget estimates Americans now spend 6.5 billion hours a year filling out tax forms.

Our Founders drafted the Constitution with fewer than 5,000 words; with later amendments it is about 8,000 words. The federal tax code is more than 9 million words. So the document that created the government is less than 0.1% as long as the tax code that funds it. Such is the state of Washington today.

Mr. Giuliani understands how the tax code frustrates and confuses many Americans, and that's why he will give every taxpayer the option of using a one-page "Fair and Simple Tax Form." Under the FAST Form, there will be only three rates: 10%, 15% and 30%. Taxpayers who prefer to use the existing forms will remain free to do so. Prized deductions for mortgage payments, state and local taxes, charitable contributions, and child tax credits will all be preserved on the FAST Form.

Moreover, taxpayers can choose each year which plan works best for them. For instance, a small business owner might take advantage of the deductions in the current tax code one year, but choose the FAST Form the next.

For many families, the FAST Form will be an easy choice. A family of four earning $80,000 per year could see their estimated federal income tax burden reduced by $2,207 -- 24%. A single person earning $35,000 -- who pays approximately 10% using the 1040 Form -- will save 13%.

The FAST form is the centerpiece of Mr. Giuliani's tax plan, but it contains many other advantageous features. He will make the Bush tax cuts permanent. He will cut the corporate tax rate, currently second-highest in the industrialized world, to 25% from 35%, helping American businesses compete while protecting and creating American jobs. He will reinstate the Research and Development Tax Credit, a spur to American innovation that Democrats recently let expire. He will repeal the death tax, which unfairly forces relatives of the recently deceased to sell small family farms or businesses to pay the tax collector. He will cut the capital gains tax to 10% from 15%, sparking private-sector investment and economic prosperity. And he will index the Alternative Minimum Tax for inflation and put in on the course to eventual elimination.

Mr. Giuliani's reforms also include a trio of tax-free savings vehicles to encourage middle-class saving: a retirement savings account; a general-purpose lifetime savings account; and a lifetime skills account (for training and education). All three would function as Roth-style accounts (funded with after tax income, but subject to no taxes upon withdrawal), and would be available to all Americans, regardless of income level.

The retirement savings account and the lifetime savings account would have $5,000 annual limits per individual, and the lifetime skills account would have a $1,000 annual limit, with an available employer match. Mr. Giuliani also champions a health-care tax exclusion of $15,000 annually for families ($7,500 for individuals) to increase Americans' access to affordable, portable, privately controlled health care.

Rudy Giuliani knows self-government, not centralized government, makes America great. His proposals demonstrate an opposition to centralized power and a commitment to a growth society. He'll have to work with congressional Democrats to make such proposals a reality, but he has done so before in New York, an overwhelmingly Democratic city.

In the presidential race, the Democrats' idea of "change" is in reality more of the same -- more power and more money for Washington. Mr. Giuliani has another idea. It begins by fixing the complicated mess of our tax code by offering something simpler, flatter and fairer.

Mr. Forbes is president and CEO of Forbes Inc. and editor in chief of Forbes Magazine.
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Crafty_Dog
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« Reply #5 on: January 25, 2008, 11:47:44 AM »

The Tax Threat to Prosperity
By ARTHUR B. LAFFER
January 25, 2008; Page A15

Over the past 30 years, the U.S. has seen large changes in income tax rates as well as other tax rates. And, as would be expected, the budgetary implications of these tax changes have once again become a hotly debated partisan issue.

But missing from the discussion are the huge differences in how the top 1% of income earners respond to changes in tax rates versus, say, the bottom 75% or 80% of taxpayers -- the so-called middle class and lowest income groups. The "rich" quite simply are not like the rest of us.

From the standpoint of logic, the supply of their taxable income should be far more sensitive to changes in tax rates than the supply of taxable income of the middle class and poor. In the highest tax bracket, 100% of all taxpayers have the highest tax rate as their marginal tax rate. And it's the marginal tax rate that elicits supply-side responses.

Of course, if you look at a tax schedule, it's obvious that people with the highest taxable income also pay taxes in every other tax bracket. These lower tax rates are "inframarginal" and don't affect behavior. From the standpoint of the rich alone, a cut in these lower tax rates reduces tax revenues.

Some 99% of all taxpayers paid taxes at the 10% rate in 2005, for example. Yet only 25% of all taxpayers had 10% as their marginal tax rate. Thus a cut in the 10% tax rate would have a supply-side impact on a relatively small portion of all those who pay the 10% rate -- while for the rest who pay the 10% rate, a tax cut would result in a deadweight revenue loss.

On these grounds alone one should expect a greater supply-side response with a change in the highest tax rate than any other tax rate.

In addition, low-income earners have a lot less flexibility to change the form, timing and location of their income -- and the avenues open to them to reduce their tax liabilities are far fewer. The avenues open to higher-income and highest-income earners include 401(k)s, IRAs, Keogh plans, itemized deductions, lifetime gifts, charitable gifts, all sorts of deferred income compensation plans, trusts, tax free bonds, etc.

 
Moreover, the culture surrounding low income earners is not nearly as focused on tax avoidance as it is in higher income earners; fewer lower-income earners, therefore, even avail themselves of the limited programs, laws and other opportunities to reduce their tax liabilities. This means that the supply of taxable income in the highest tax bracket should be far more responsive to incentives than it is in the lower tax brackets, all other things being equal.

Many tax-avoidance methods require expert advice and counsel from people such as tax accountants, lawyers, deferred compensation experts and, yes, even economists. Higher-income people find tax accountants and lawyers and other financial professionals far more cost-effective than do people with lower incomes, not only because the costs are spread over larger sums, but because the pursuit of tax avoidance is, dollar of income for dollar of income, more profitable at higher tax rates. This makes the taxable incomes of those who earn more, more variable, and the taxable incomes of those who earn less, less variable.

Academicians and politicians have finally come to understand that it's the after-tax rate of return that determines people's behavior. Even though statutory tax rates are far lower today than they were when, say, Kennedy or Reagan took office, it is still very true that for every dollar of static revenue change there is a much larger incentive affect in the highest tax bracket than in the lowest tax bracket.

But what actually happens to tax receipts by income tax bracket when tax rates change?

Since 1980, statutory marginal tax rates have fallen dramatically. The highest marginal income tax rate in 1980 was 70%. Today it is 35%. In the year Ronald Reagan took office (1981) the top 1% of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, the top 1% paid 39.38% of all income taxes.

There are other ways of looking at tax receipts by income bracket. From 1981 to 2005, the income taxes paid by the top 1% rose to 2.96% of GDP, from 1.59% of GDP. There was also a huge absolute increase in real tax dollars paid by this group. In 1981, the total taxes paid in 2005 dollars by the top 1% of income earners was $94.84 billion. In 2005 it was $368.13 billion.

In 2000 this teeny, tiny group -- 1% of all taxpayers -- actually paid income taxes equal to 3.75% of GDP, which is why President Clinton had a budget surplus. Much of this huge surge in tax payments by the top 1% of tax filers resulted from the huge increase in realized capital gains resulting from President Clinton's capital gains tax rate cut to 20% from 28% in 1997.

Let's take a look at the bottom 75% of taxpayers over this same time period -- the group current Democrats refer to as middle- and lower-income earners. From 1981 through 2005, the share of all income taxes paid by the bottom 75% of all income earners (as reported on the individual income tax returns) declined to 14.01% from 27.71%. As a share of GDP, total taxes paid by the bottom 75% fell to 1.05% from 2.50%. The bottom 75% of all taxpayers today pay less than 35% of all the taxes paid by the top 1% of all income earners.

Over the last 25 years, the bottom 75% of all taxpayers' tax payments fell and their tax rates fell. This is the group the Democrats are targeting for tax cuts.

The important point here is that, over the last 25-plus years, the only group that experienced an increase in income taxes paid as a share of GDP was the top 1% of income earners. Even the top 2%-5% of income earners saw a decline in the GDP share of their income taxes paid.

But now we get to the secret sauce, and the essence of what really happens in the realm of tax rates, incomes and tax payments by the rich.

We have accurate data on both the total taxes paid by the top 1% of income earners, and on their comprehensive household income as measured by the Congressional Budget Office. From these two data series we can calculate the effective average tax rate for the top 1% of all income earners.

Surprise, surprise: The effective average tax rate for the top 1% of income earners barely wiggles as Congress changes tax codes after tax codes, and as the economy goes from boom to bust and back again (see chart).

The question is, how can that effective average tax rate be so stable? The answer is simply that the very highest income earners are and have always been able to vary their reported income and thus control the amount of taxes they pay. Whether through tax shelters, deferrals, gifts, write-offs, cross income mobility or any of a number of other measures, the effective average tax rate barely budges. But this group's total tax payments are incredibly volatile.

For the low- and middle-income earners, the effective average tax rate has tumbled over the past 25 years, and so have tax revenues no matter how they're measured.

Using recent data, in other words, it would appear on its face that the Democratic proposal to raise taxes on the upper-income earners, and lower taxes on the middle- and lower- income earners, will result in huge revenue losses on both accounts. But some academic advisers to Democratic candidates have a hard time understanding the obvious, devising outlandish theories as to why things are different now. Well they aren't!

In the 1920s, the highest federal marginal income tax rate fell to 24% from 78%. Those people who earned over $100,000 had their share of total taxes paid rise -- from 29.9% in 1920 to 48.8% in 1925, and then to 62.2% in 1929. There was no inflation over this period.

With the Kennedy tax cuts of the 1960s, when the highest tax rate fell from to 70% from 91%, the story was the same. When you cut the highest tax rates on the highest-income earners, government gets more money from them, and when you cut tax rates on the middle and lower income earners, the government gets less money from them.

Even these data grossly understate the total supply-side response. A cut in the highest tax rates will increase lots of other tax receipts. It will lower government spending as a consequence of a stronger economy with less unemployment and less welfare. It will have a material, positive impact on state and local governments. And these effects will only grow with time.

Mark my words: If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years until a new Harding, Kennedy or Reagan comes along.

Trained economists know all of this is true, but they try to rebut the facts nonetheless because they believe it will curry favor with their political benefactors.

Mr. Laffer is president of Laffer Associates.

See all of today's editorials and op-eds, plus video commentary, on The Editorial Page.

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ccp
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« Reply #6 on: April 17, 2008, 11:02:27 PM »

JM has if for some real change.  I'm impressed and pleasantly surprised.

I would like to hear Doug's thoughts on this since he is astute on tax policy: 

http://www.cnn.com/2008/POLITICS/04/15/mccain.economy/index.html?eref=rss_politics&iref=polticker
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