I was glad to hear Sen. John Kerry quote Abraham Lincoln as he accepted the Democratic nomination, but he did not read Lincoln far enough. Lincoln famously said, “I don’t believe in a law to prevent a man from getting rich; it would do more harm than good.” He continued, “When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows there is no fixed condition of labor for his whole life.” This is what Lincoln called the True American System. The rhetoric reverberating from the halls of the FleetCenter, however, was far less optimistic, far less edifying and certainly not consistent with the dynamic American system envisioned by Lincoln.
The Kerry-Edwards economic agenda is now clear: They see the American system as a zero-sum game. This view was best expressed by former President Clinton, who said, “I almost sent them [Republicans] a thank you for my tax cut until I realized the rest of you were paying for it.” What a contradictory view of America from someone who signed into law a 25 percent cut in the capital gains tax.
Kerry added, “I will roll back the tax cuts for the wealthiest individuals who make over $200,000 a year …,” which would include roughly 70 percent of all small businesses. Promising middle-class tax cuts while raising them for people earning more than $200,000 is not only class warfare at its worst, it’s contrary to American values. It raises the cost of capital, and it contradicts everything we know about where revenue comes from.
The top 2 percent of taxpayers pay more than 40 percent of all federal income taxes. The New York Times recognized that “falling incomes, rather than tax cuts, appear to count for the greatest decline in income taxes paid.” Not only left-leaning Democrats, but too many Republicans don’t understand the difference between tax rates and tax revenue. As John F. Kennedy reminded us in 1962, “It is a paradoxical truth that tax rates are too high and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now.”
If you want to soak the rich, cut tax rates. As secretary of Housing and Urban Development, I spent a lot of time talking to people who lived in public housing. I never heard one person say they want to make the rich poor; they only want the opportunity to get ahead and get out of poverty. High tax rates don’t hurt the rich, who can shelter their income; high tax rates just keep the poor in poverty. You can’t get rich on wages. The only way to get rich is to earn, save and invest.
Moreover, as the middle class gets richer, they are driven into higher tax brackets, which Kerry wants to make even higher. So when Kerry talks about a “middle-class squeeze,” he is really laying a middle-class bear trap into which average folks will walk as they improve their lot in life. This is what class warfare breeds – it lowers revenues, slows growth and results in fewer jobs. Conversely, the great classical economist Ludwig von Mises observed, “If you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise.”
Kerry makes an age-old mistake of treating workers’ station in life as static. That is exactly wrong. A worker earning “middle-class” income today may be in the top 1 percent tomorrow. Researchers at the Urban Institute found that anywhere from 25 percent to 40 percent of Americans move from one income quintile to another in a single year. Over longer periods the shifts are even larger: about 45 percent over five years and 60 percent over average 15-year periods. Today’s laborer is tomorrow’s investor, owner and job creator. The worker and the investor are the same person, just at different stages of his or her life.
Lincoln was a hired laborer, mauling rails, at work on a flatboat, but he became a lawyer, a politician and eventually the president of the United States.
I’m not suggesting Kerry will confiscate people’s wealth, but he doesn’t understand the True American System, and by blundering around brandishing weapons of class warfare, he inevitably will damage the economy and make everyone poorer, and it is the poor who can least afford to become poorer.
It isn’t spending and consumption that increase wealth, it’s saving and investment. Kerry’s idea to cut the corporate tax rate is a good one, but he doesn’t seem to understand why. Otherwise he could generalize that one good idea to a larger vision: Reform the tax code to make it simpler, less punitive, taxing income only once at the lowest rate possible. If we lower the rate, we will increase the size of the economy, i.e., the tax base, and before long generate larger revenues from a larger tax base at a lower rate than we can ever hope to by retarding economic growth and attempting to raise revenue at a higher rate from a smaller economy.
We don’t need to slash spending or increase the tax rates on any Americans. Instead, we need to concentrate on slowing the growth in government spending, we need to create an “ownership society” by reducing the cost of capital and labor, we need to eliminate barriers to saving and investment, we need to pursue and embrace free trade, we need to enable every worker to become a stakeholder in the American dream through personal retirement accounts and we need to revitalize our urban centers with supercharged enterprise zones. These are big ideas. This is a vision, not for two Americas, and not for some Americans, but for all Americans.