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The Public Policy
The Invincible Lie: Part II
As far back as the 1920s, a huge cut in the highest income tax rate led to a huge increase in the amount of tax revenue collected by the federal government. Why?
Nothing produces more of a sense of the futility of facts than seeing someone in the mass media repeating some notion that has been refuted innumerable times over the years.
On July 9th, on CNN’s program “The Situation Room” with Wolf Blitzer, commentator Gloria Borger discussed President Obama’s plan to continue the temporary extension of the tax rates established under the Bush administration — except for the top brackets, where Obama wanted the tax rates raised.
Ms. Borger said, “if you’re going to lower the tax rates, where are you going to get the money from?”
First of all, nobody is talking about lowering the tax rates. They are talking about whether or not to continue the existing tax rates, which are set to expire after a temporary extension. And Obama is talking about raising the tax rate on higher income earners.
But when Ms. Borger asked, “where are you going to get the money from?” if you don’t raise tax rates, that assumes an automatic correlation between tax rates and tax revenues, which is demonstrably false.
As far back as the 1920s, a huge cut in the highest income tax rate — from 73 percent to 24 percent — led to a huge increase in the amount of tax revenue collected by the federal government. Why? Because investors took their money out of tax shelters, where they were earning very modest rates of return, and put their money into the productive economy, where they could earn higher rates of return, now that those returns were not so heavily taxed.
This was the very reason why tax rates were cut in the first place — to get more revenue for the federal government. The same was true, decades later, during the John F. Kennedy administration. Similar reasons led to tax rate cuts during the Ronald Reagan administration and the George W. Bush administration.
All of these presidents — Democrat and Republican alike — made the same argument for tax rate reductions that had been made in the 1920s, and the results were similar as well. Yet the invincible lie continues to this day that those who oppose high tax rates on high incomes are doing so because they want to reduce the taxes paid by high income earners, in hopes that their increased prosperity will “trickle down” to others.
In reality, high income earners paid not only a larger total amount of taxes after the tax rate cuts of the 1920s but also a higher share of all the income taxes collected. It is a matter of record that anyone can check out with official government statistics.
This result was not peculiar to the 1920s. In 2006, the New York Times reported: “An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”
Expectations are in the eye of the beholder. Tax cut proponents expected precisely the result from the Bush tax cuts that so surprised the New York Times. So did tax cut proponents in the John F. Kennedy and Ronald Reagan administrations.
If this concept has not yet trickled down to the New York Times or CNN’s Gloria Borger, that is a commentary on the media commentators.
Ms. Borger may simply not know any better, but Barack Obama cannot use that excuse. When he was a candidate for president back in 2008, Charles Gibson of ABC News confronted him with the fact that there was no automatic correlation between the raising and lowering of tax rates and whether tax revenues moved up or down.
Obama admitted that. But he said that he was for raising tax rates on higher income earners anyway, in the name of “fairness.” How higher tax rates that the government does not actually collect make any sense, whether from a fairness perspective or as a way of paying the government’s bills, is another question. The point here is that Obama knew then that tax rates and tax revenues do not automatically move in the same direction.
In other words, he is lying when he talks as if tax rates and tax revenues move together. Ms. Borger and others in the media may or may not know that. So they are not necessarily lying. But they are failing to inform their audiences about the facts — and that allows Obama’s lies to stand.
COPYRIGHT 2012 CREATORS.COM
About the Author
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
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Appleby| 7.13.12 @ 6:45AM
Obama is catering to that group of the electorate who suffer from toxic envy, who believe that every dime in the world rightfully belongs to them, and anything other people have is somehow rightfully theirs. Socialism is at heart the earnest wish, not that you should have what others have, but that you should have it AND THEY SHOULD NOT. This is what I have learned by living under socialism; it's a system seen most often in the sandbox, where a toddler attempts to gather up all the toys and prevent the other kids from playing with them, meanwhile screaming "Mine! Mine! Mine!"
Petronius| 7.13.12 @ 11:57AM
Thanks. Now I can take this thread off.
MTB| 7.13.12 @ 12:45PM
I remember a clip from Andrew Breitbart at some kind of rally in Palm Springs, CA, I think it was. There was one guy who seemed unhinged and demented who screamed at the top of his lungs: "It's our money. We want it, and we're going to take it."
JD| 7.13.12 @ 2:09PM
They think it's theirs because they think global wealth is a fixed constant, like matter or energy. They think a $9.75 dinner is still worth $9.75 when it comes out the other end. With wealth as a fixed constant whose production and existence isn't particularly owned by anyone, anything you consume is "taken" from others.
Brookschwarzenegro | 7.13.12 @ 6:44PM
Funny,
Jesus was a bigger socialist than Marx: Christ was a longhaired bearded robe-wearing wanderer who espoused selling what one has to give to the poor, rendering taxes to Caesar, giving away even one's cloak, turning one's cheek to enemies (He was a peacenik), overturning the moneychangers tables in temple...
In the '50s, His sort would have took the Fifth in front of HUAC and been blacklisted.
axbucxdu| 7.15.12 @ 10:06AM
Al,
If recall correctly, Marx told the untermenschen to take, not give.
Brookschwarzenegro | 7.15.12 @ 9:49PM
"If recall correctly, Marx told the untermenschen to take, not give."
That's what makes Marx more of a socialist than Jesus: Marx said to be grasping, Jesus said to share.
Mimi | 7.13.12 @ 7:24AM
A person, situation, or action exhibiting inexplicable or contradictory aspects . An assertion that is essentially self contradictory, although statement contrary to received opinion...definition of the word....PARADOX ( American Heritage Dictionary)
Take your pick... Is it a LIE or STUPIDITY???
Where is the news media when you really need them...This could be a teachable moment for HISTORY!
Pecos Pete| 7.13.12 @ 8:08AM
Dr. Sowell: It is NOT FAIR for you to write the truth.
MK48| 7.13.12 @ 10:01AM
Somewhere I read the TRUTH will set you FREE.....I hope so come November.
Anthony| 7.13.12 @ 10:26AM
This is one of the most imperturbable lefty carnards of all time; that lowering taxes reduces tax revenue.
One has to be willfully dishonest or just plain stupid to repeat this oft proven demonstrable falsehood.
All of leftism is a deceit, a lie, or the product of massive stupidity.
Fast and Curious| 7.13.12 @ 3:05PM
Very true. Why is this tax/revenue relationship not repeated constantly by conservatives?? I've never been able to figure that out.
When liberal talking heads are confronted with these facts, I've heard this response most often:
"Not true! If you look at the revenues after the Reagan tax cuts, they were the same or less as a percentage of GDP.". Same with Bush cuts.
Now, anyone with half a brain can see that the increase in GDP is the WHOLE POINT! The pie (GDP) grows when wealthy people and businesses invest money instead of paying it to the gubmint. So 10% of a dollar is more than 10% of 75 cents. "but revenues stayed at 10% " say the libs.
Unreal.
JD| 7.13.12 @ 4:34PM
Liberals have an infinite capacity to use misleading statistics in place of telling statistics. Remember, like the ancient Egyptians, using slaves to build ever-larger monuments to the egos of their leaders, liberals measure our society's prosperity by the size of its government. A richer private sector, at the expense of government, is not a good thing in their worldview.
1654american| 7.15.12 @ 8:39AM
Economics 101 with basic supply-demand curves are apparently not part of the curriculum in Jounalism or Political Science.
Von Mises Jr| 7.13.12 @ 4:42PM
Anthony, my friend. We know that liberalism is a lie. These are the people that claim superiority by being victims. If you are superior, you would not be a victim.
These are the people that want to take other peoples stuff that they earned for themselves based on the premise of fairness. What is fair about using the government to steal for you?
Some of these people are really that stupid. But most have just stopped thinking since it is so incriminating to admit what socialism is and its morality.
CJW| 7.13.12 @ 5:34PM
Lefties do understand that that lowering a tax rate will leave more money to us so we can decide how to spend it. They just do not want us to have the money to spend, they want the government to have to money to spend. Nothing complilcated. It is all about power and control with them.
Von Mises Jr| 7.14.12 @ 7:39AM
It is all about the government (force) giving it to them and their hoe.
JayDick| 7.13.12 @ 10:34AM
Part of the problem is the congressional scoring system. The Congressional Budget Office is required to estimate the effects of proposed tax changes using only "static" analysis. That is, the estimate is based on everything being the same except for the proposed tax changes.
This is nonsense. As Dr. Sowell says, when tax rules change, especially rates, peoples' behavior changes, affecting revenue. But CBO scoring never takes this into account, so you get crazy estimates of the revenue effects of proposed tax changes.
Diefledermaus| 7.13.12 @ 3:07PM
One good reason the CBO needs to go away. I wonder how many millions they waste each year calculating BS.
The same goes for the GAO. Can anyone truly say they are worth what we pay for them?
JD| 7.13.12 @ 4:35PM
The CBO does a fine job reporting history. They do a terrible job predicting the future.
JayDick| 7.13.12 @ 5:13PM
CBO is only as good as its ground rules, which Congress establishes, not CBO. As for GAO, I worked there many years, so I know something about it. Not everything they do is worthwhile, but many things are. They were also the most frugal government organization I ever encountered. Of course, their work is only as good as the use made of it. If Congress doesn't use the information GAO provides, then it's not worthwhile.
Anthony| 7.13.12 @ 10:53AM
It appears all of "government scoring" is a fraud. The U-3 unemployment rate, cited by all the frauds in the media, and our own R candidates, as opposed to the U-6, does not include those who "dropped" out of the labor pool. They still EXIST, yet don't under government Alice-in-Wonderland scoring.
Same with inflation, inflation will remain artificially low if you exclude energy and food.
Is every g damned federal bureaucrat named Rube Goldberg???
C'mon Man!| 7.13.12 @ 12:35PM
No, the libs including Ms. Borger know the truth about tax rates and resulting revenues, but admitting it would admit they were lying, and then they would lose their power, which is the most important thing to a liberal. The "most caring among us" really care the least. It's like when a Christian has to spend so much time telling you how good a christian they are, they really aren't.
Tom Kyba| 7.13.12 @ 1:56PM
First of all, Gloria Borger has the intellectual capacity of a minnow hanging from a fishing hook. Secondly, you think it's tough to wake people up in the U.S. re tax revenues, try floating the "reduced tax rates equals more revenue" idea up here in Canada. You will receive nothing but blank looks.
Appleby| 7.13.12 @ 6:22PM
Most of Canada's problems could be fixed quite easily if they weren't fixated on finding out what the Americans do and doing the opposite.
Canada HAS an identity other than "We're Not Americans!" Or anyway it used to.
Abu Nudnik| 7.14.12 @ 12:03PM
Much worse than that, Mr. Appleby. Canada is a juridical oligarchy now. The head of the Supreme Court announced on a talk show that every season the court makes a list of bills for parliament to pass and a due date. The talk show host didn't even ask what Canadians do if they don't like the laws written by the men and women in robes and what the purpose of elections of members of parliament would be.
But you're right about the anti-American reflexiveness, particularly on the left.
Abu Nudnik| 7.14.12 @ 12:01PM
A massive redistribution of income is the admitted policy and intention of Barack Obama. He said so in a radio interview in 2008. "Unfortunately" he mourned, "The Court is not the best way to massively redistribute income." He then suggested that community organizers on the outside working with members inside Congress was the way to go. Like Fanny and Freddie working with ACORN redistributed income through the housing market.
Fiscal| 7.15.12 @ 8:22AM
I'm sorry, Mr. Sowell, but it would be nice to stick to the facts. Unless you manipulate the data by choosing specific low and high points, the longer term trend on government revenue shows no significant change in the slope of the curve over time that is in any way related to marginal tax rates. In fact, the effective tax rates only change a few percentage points even when there are huge changes in the marginal rate. Here is a chart of long term revenue directly from the government:
http://www.usgovernmentrevenue.....011lcn_F0t
Furthermore, if you do this analysis as a percentage of GDP -- the proper normalization of this data -- it is even more evident.
While we need a less progressive tax system to enhance a free market, continued misstatements on tax cuts is not helpful.
JD| 7.15.12 @ 2:15PM
Fiscal,
First, normalizing by comparing to GDP is NOT "proper" in this case. Doing so presumes that GDP changes independently of tax rates, which is exactly what Sowell and others are proving is not true. The credits GDP growth for tax revenue increase, when in fact tax rate decrease should be credited for GDP growth.
Furthermore, you compare "marginal tax rates" to "total government revenue." This is apples to oranges, in terms of debunking Sowell. First, as any good conservative knows, "marginal tax rates" are a very deceptive statistic. With all the complexity in the tax code, a person can pay more under lower marginal rates than under higher ones. The Left frequently hides this fact while drawing false conclusions from the relationship between marginal tax rates and other data. No good conservative should ever use "marginal tax rates" in a correlation. They're never used honestly.
Meanwhile, Sowell seemed to be focusing on federal INCOME TAX revenue, relative to income tax rates. Counting TOTAL REVENUE allows changes in other revenue systems to mask the income tax effects.