Raising Taxes Might Help Democrats, But Not the Economy

The way out of the recession is to cut federal spending, not raise taxes.


The fight is on over the forthcoming Obama tax increases.

The White House is on record as opposing the extension of at least some of the lower tax rates that went into effect in 2001 and 2003, particularly those that have the most stimulating effect on the U.S. economy. In this they are in sync with congressional Democratic leaders who think they can maintain their majorities by allowing tax rates to go up.

[Check out a roundup of editorial cartoons on the economy.]

Their argument, that raising taxes on top earners in a time of economic difficulty is the “fair” thing to do, may have political appeal. After all, 47 percent of Americans--according to the latest figures--don’t pay any income taxes to begin with. Any scheme that involves taking from Peter to pay Paul will almost always have Paul’s consent.

The economic realities of such a scheme, however, are far different.

The historical data available from the IRS, noted economist Arthur Laffer wrote earlier this week in the Wall Street Journal, demonstrates again and again that “raising income tax rates on the top 1 percent of income earners will most likely reduce the direct tax receipts from the now higher taxed income--even without considering the secondary tax revenue effects, all of which will be negative.”

As Laffer explains:

Since 1978, the U.S. has cut the highest marginal earned-income tax rate to 35 percent from 50 percent, the highest capital gains tax rate to 15 percent from about 50 percent, and the highest dividend tax rate to 15 percent from 70 percent. President Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0 percent for almost all home owners. We've also cut just about every other income tax rate as well. During this era of ubiquitous tax cuts, income tax receipts from the top 1 percent of income earners rose to 3.3 percent of GDP in 2007 (the latest year for which we have data) from 1.5 percent of GDP in 1978.

As it has been shown again and again, raising tax rates depress rather than increase economic activity. And depressed economic activity decreases the amount of revenue flowing into federal coffers--which means higher rather than lower federal deficits.

The way out of the economic morass in which the nation is currently mired is to cut federal spending, not to raise taxes. The way to jump start the economy activity is to make productive activity, including investment, more attractive by keeping tax rates low, not by allowing them to go up.

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