Congressman Patrick Kennedy, a Rhode Island Democrat, recently declared to fellow party members at a Washington night spot, “I don’t need Bush’s tax cut” and added that he had never worked a day in his life.
A number of other rich people have at various times likewise declared that they do not need what are called “tax cuts for the rich.” But, whatever political points such rhetoric may score, it confuses issues that are long overdue to be clarified.
One of the most basic confusions is between income and wealth. You can have high income and low wealth or vice versa. We have all heard of athletes and entertainers who have earned millions and yet ended up broke. There are also people of relatively modest incomes who have saved and invested enough over the years to leave surprisingly large amounts of wealth to their heirs.
Income tax cuts apply to income, not wealth. So the fact that some rich people say that they do not need a tax cut means nothing because they are not getting a tax cut on their wealth, since their wealth is not being taxed anyway.
Looked at differently, high tax rates hit people who are currently earning high incomes — usually late in life, after having worked their way up in their professions over a period of decades. Genuinely rich people who have never had to work a day in their lives — people like Congressman Kennedy — are unaffected by income taxes, except on what they are currently earning, which may be a tiny fraction of what they own.
In other words, soak-the-rich tax rates do not in fact soak the rich. They soak people who are currently earning the rewards of having contributed to the economy. High income taxes punish people for becoming prosperous, not for having been born rich.
Even estate taxes can be minimized by hiring ingenious lawyers and accountants. But people who have had to work all their lives may not be nearly as able to afford such expensive ingenuity.
Someone who eventually works his way up to $100,000 a year will qualify as “rich” in liberal rhetoric but, by the time you reach that level, you may have a child in college and need to put some money aside for your retirement years. You are very unlikely to be able to afford a yacht.
Another fundamental confusion over tax cuts is confusing lower tax rates with reductions in tax revenues collected by the government. One of the enduring political myths of our generation has been the claim that the rise of federal deficits during the 1980s resulted from President Ronald Reagan’s “tax cuts for the rich.”
Tax rates were cut. Tax revenues were not. More tax revenue was collected during every year of the two Reagan administrations than had ever been collected in any previous year in the history of the country. Nor was this experience unique.
When John F. Kennedy cut tax rates during the 1960s, tax revenues went up. The whole point was — and is — to encourage more economic activity, and more activity generates more tax revenues, even at lower rates. The same thing happened back in the 1920s.
Why then were there federal deficits during the Reagan administration? Because Congress spent even more money than the rising tax revenues brought in. There is no amount of money that Congress cannot outspend.
Although these were christened “the Reagan deficits,” all spending bills originate in the House of Representatives — and Ronald Reagan was never a member of the House of Representatives. Indeed, the Republicans never controlled the House of Representatives during either of the Reagan administrations.
Only after the Republicans gained control of the House in 1994 were there budget surpluses — for which Bill Clinton took credit, even though he too had never been a member of Congress.
It is fascinating to see Congressional Democrats, who have for decades been spending the country into growing deficits, suddenly expressing shock at the current deficits that have occurred while George W. Bush was in the White House — and the country was at war.
How serious are these deficits? As with all debts, the burden depends on what your income is. As a percentage of national income, today’s deficits and national debt are far below what they were when Democrats were doing the spending.