The Richmond Register

Viewpoints

December 6, 2012

Higher tax rates won’t support entitlement state

The fiscal cliff negotiations seem to be foundering on Barack Obama’s insistence on higher tax rates on high earners and House Republican leaders’ insistence on opposing them. The president believes he has a mandate from voters for his position, and House Republicans believe they have a mandate from voters for theirs.

The real argument here is over the size and scope of government. Under Barack Obama, federal outlays – the technical term for federal spending – have increased to 24 and 25 percent of gross domestic product.

That’s a higher level of federal spending than in any year since 1946, when we were demobilizing after World War II. And the Obama budgets envision federal spending to continue at such levels more or less indefinitely.

This is an inevitable result, some Obama backers argue, of our aging population. Spending for entitlement programs for the elderly – Social Security and Medicare – are on a rising trajectory, and so the federal government simply must absorb a higher percentage of the economy than in the last two-thirds of a century.

Let’s adjust the trajectory, House Republicans argue, by reforming the entitlements. Obama has given lip service to this idea – but has offered no specifics.

He seems to be paying attention to those Democrats who oppose any changes in entitlements. Just raise taxes, they seem to say, and entitlements can keep rising as scheduled.

The problem is that, as historian Paul Rahe wrote earlier this year, “we no longer have the resources to support the entitlement state. We can certainly raise taxes, as President Obama and the Democrats intend to do, but that does not mean that in the long run we will take in more revenue – and it is massively increased revenue that the entitlement state needs.”

Rahe seems to have history on his side. To see why, take a look at the Economic Report of the President 2012, Appendix B, Table B-79, on page 412, which shows federal receipts – the technical term for revenues – and outlays as a percentage of gross domestic product for every year from 1939 to 2011, with estimates for 2012 and 2013.

Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.

The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.

That’s just because tax rates are too low, Obama backers reply. Just raise the rates on high earners, and the problem will be solved.

Actually, high earners don’t make enough money to close the current budget deficit. You’d need to raise taxes on middle-income earners too.

But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates – like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s – have never produced federal receipts higher than 20 percent of GDP.

Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.

According to a Congressional Research Service study, the effective income tax rate on the top 0.01 percent of earners in the days of nominal 91 percent tax rates was only 45 percent. Others have pegged it at 31 percent.

In the 1970s, when the top rate on wage and salary income was 50 percent and 70 percent on investment income, high earners spent much of their time and energy seeking tax shelters. The animal spirits of capitalists, to use John Maynard Keynes’ term, were directed less at productive investment and more at tax avoidance.

But don’t European nations extract more in taxes from their citizens? Yes, but through consumption taxes like the value-added tax. But those taxes tend to be regressive, and in this country sales taxes have been the province of states and localities.

Barack Obama and the Democrats may well get higher tax rates. But it’s not likely that high tax rates can ever generate enough revenue to fund unreformed entitlement programs.

Michael Barone, senior political analyst for The Washington Examiner (www.washingtonexaminer.com), is a resident fellow at the American Enterprise Institute, a Fox News Channel contributor and a co-author of The Almanac of American Politics. To find out more about Michael Barone, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

© 2012 THE WASHINGTON EXAMINER

DISTRIBUTED BY CREATORS.COM

1
Text Only
Viewpoints
  • Ronnie-Ellis.jpg Compromise is not that simple

    It’s tempting for a casual onlooker to wonder why the Democratic House and Republican Senate can’t make what on the surface looks like the obvious compromise on pension reform.
    The Senate passed a measure based on recommendations of a task force to move new employees into a hybrid, cash-balance plan but maintain existing defined benefits for current employees and retirees.

    March 23, 2014 1 Photo

  • Jim Waters.JPG Frankfort plays ping-pong with public pension transparency

    Legislation that would make the Kentucky Retirement Systems transparent for those paying its bills has danced into the spotlight during the 2014 session of the Kentucky General Assembly.
    Passage of transparency bills filed by Sen. Chris McDaniel, R-Latonia, and Rep. Robert Benvenuti, R-Lexington, would make the “names, status, projected or actual benefit payments” subject to our commonwealth’s superlative Open Records Act.

    March 14, 2014 1 Photo

  • Jack Strauss-BW.jpg The case of the ghostly neighbor

    Wilbur lived in a world of fears. Everything frightened him. The full extent of his courage was to admit that he had none.
    Noises in the middle of the night, his own shadow creeping up on him and, most of all, black cats scared the wits out of him.
    So, picture his chagrin, one day, when he came home from vacation only to discover that a mausoleum had been erected on property adjacent to his home.

    March 8, 2014 1 Photo

  • Provisional concealed-carry law passes Senate unanimously

    Things are staying busy in Frankfort. Many bills are making their way onto the Senate floor from various committees. This past week several important pieces of legislation were debated and passed.
    I am particularly proud of the success we had in advocating for Kentuckians’ Second Amendment rights.
    I introduced Senate Bill 106 to allow anyone who has been granted an emergency protective or domestic violence order to receive a provisional CCDW permit from the Kentucky State Police in one business day. In some of these cases, victims need this type of protection as quickly as possible.

    March 8, 2014

  • Ronnie-Ellis.jpg 50 years makes a world of difference

    I wasn’t in Frankfort on March 5, 1964, when Dr. Martin Luther King Jr., Ralph Abernathy, and Jackie Robinson led 10,000 on a march to the state Capitol in support of a public accommodations law.
    But a few months later, I stood in front of the “Music Hall,” site of the Glasgow Junior High School located on a street named Liberty, and watched black kids “walk up the hill” of College Street on the first day of integrated schools in Glasgow.

    March 8, 2014 1 Photo

  • 02.23 Mike Duncan mug.jpg Coal has kept Kentuckians warm this winter

    This winter, temperatures across the country dipped to historic lows. Here in our home state of Kentucky, the near-arctic climate caused increased power demand which resulted in an incredible strain on the electric grid and rising energy costs.

    March 6, 2014 1 Photo

  • Jim Waters.JPG Protecting citizens’ data is a no-brainer

    Target Corp. is learning the hard way: The price is steep for retailers who don’t protect customers’ sensitive financial information.
    Target’s profits fell a whopping 50 percent during its fourth quarter of 2013 as the result of a massive security breach involving as many as 110 million of its customers’ credit- and debit-card accounts, which began the day before Thanksgiving and extended throughout much of the holiday shopping season.

    March 1, 2014 1 Photo

  • Ike Adams Making plans for spring planting

    My brother Keith (Keeter) probably planted peas on one of those warm days last week, and I would not be at all surprised to find out that brother Steve did likewise to try to be the first two fellows in Letcher County to actually be digging the soil in their 2014 gardens.
    Keeter’s father-in-law, the late Dock Mitchell, used to get my brother to drive him a 50-mile round trip to get pea seeds and potting soil for early February planting. Dock raised mammoth melting sugar snow peas and sugar snaps around every fence on the place. 

    February 27, 2014 1 Photo

  • Ronnie-Ellis.jpg Cynicism, optimism both on display in Frankfort

    Those who spend little time in Kentucky’s Capitol and who read columns by cynics who cover it should be forgiven their disillusionment about how the people’s business is conducted.

    February 22, 2014 1 Photo

  • Ike Adams Even Scrooge would enjoy library mystery

    Saturday afternoons and evenings are usually down time for Loretta and me.
    We simply don’t get out much after we’ve used up the movie gift certificates the kids gave us for Christmas. That means we mostly go to the movies to avoid guilt trips because our kids do work hard for their money.

    February 20, 2014 1 Photo

AP Video
Raw: Magnitude-7.2 Earthquake Shakes Mexico City Ceremony at MIT Remembers One of Boston's Finest Raw: Students Hurt in Colo. School Bus Crash Raw: Church Tries for Record With Chalk Jesus Raw: Faithful Celebrate Good Friday Worldwide Deadly Avalanche Sweeps Slopes of Mount Everest Police Arrest Suspect in Highway Shootings Drought Concerns May Hurt Lake Tourism Vermont Goat Meat Gives Refugees Taste of Home Calif. Investigators Re-construct Fatal Bus Cras Mayor Rob Ford Launches Re-election Campaign Appellate Court Hears Okla. Gay Marriage Case Author Gabriel Garcia Marquez Dead at 87 Chelsea Clinton Is Pregnant Flamingo Frenzy Ahead of Zoo Construction Crew Criticized Over Handling of Ferry Disaster Agreement Reached to Calm Ukraine Tensions Boston Bombing Survivors One Year Later
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide
Poll

Should the Richmond City Commission stop rezoning property to allow construction of apartments?

Yes.
No
     View Results