Taxes: Will raising tax RATES increase Revenues?

Hi, Terry,

I read your columns' on a regular basis. They are quite informative and enlightening. I would like to ask you a questions concerning the evil four letter word in business (actually its five): taxes.

We have heard that governments need more money to run their districts. My understanding is that many local and state governments are having problems collecting enough revenues to function in the black. This appears to me to be a double edged sword. If these governments cannot run properly, then they need to reduce spending, but yet, it is difficult for them to shut down completely. Since people's incomes have been sharply reduced, they just don't have the tax revenues from their citizens.

This leads me to my question, has there been any research to suggest there is an optimal tax rate for a government's citizens? Does one exist? If so, how can it be applied fairly and evenly?

Thank you for all the hard work you do.

SAVAGE SAYS: Thanks for your nice note, and thoughtful analysis. I can only say that in the Bible, even God only asked for 10 percent!

I'd like to make a few points if I may:

-While I think all rational people do agree that at a certain point, taxes can curb productivity, where we tend to disagree is on the exact location of that "tipping point". It stands to reason that the "perfect" tax rate, from a revenue standpoint, is the highest possible amount before you reach this point in the tax/productivity curve, as opposed to just slashing the rate to the bone because taxes aren't exactly the most popular or pleasant thing in the world.

-We are at a point in this county where the income generated by the truly rich (as opposed to the upper middle class which sometimes end up with the "rich" label) can afford to pay exorbitantly high rates and still maintain a luxury standard of living that far outclasses the rest of the population and still provides sufficient incentive for them to produce. Someone with an income in the millions of dollars annually, which many at the top of the economic pyramid now earn (or have through non earned means) can afford a rate of 50%+ while still clearing a net income higher than 95% of the population. The key is to make sure you're actually talking about the truly rich, as opposed to the "kind of rich."

Just my two cents

Terry,

Regarding taxes, I agree with you 100%. I have attached a copy of the letter I sent to the Times in response to this clown from Northwestern. How do these guys get a job at a school as prestigious Northwestern? This guy is either clueless or completely disingenuous.

I have been a small business owner for over 28 years and I can tell you that tax rates absolutely effect how hard you work or more importantly what you do with your money. If you think the rates are high you play games to avoid the taxes like sitting on checks (payment from clients) and not depositing them till the next year hoping that you can postpone income till you can get a more favorable rate.

My only disappointment with your column is that you didn’t mention that the more they have cut the top tax rate the higher the percentage of the overall tax burden that the top taxpayers wind up shouldering. I have been trying for years to get a letter published that points this out but have been shut out by both the Times and the Tribune. They both are doing their best to keep the masses ignorant to this fact.

Regards,

John

In a response to Terry Savage’s recent editorial the Times published several letters that took umbrage with her stand on taxes. Edward Stuart who claims to be a professor of Economics at Northwestern states that “there is no economic research which supports the contention that tax cuts increase federal revenues or economic growth”. He goes on to state that “when Bill Clinton raised the top marginal rate on federal personal income tax in 1993, federal tax revenues rose so significantly that we had a federal budget surplus and sustained economic growth for most of the last half of the 1990’s”.

If you have a kid in this guy's class I would demand a refund. Did the professor not happen to see that tax revenues nearly doubled under Regan after the tax cuts? As far as taxes and the economy under Clinton are concerned, Bill Clinton cut the capital gains tax. He also had a Republican Congress that reigned in domestic spending and made substantial cuts in defense. The economy boomed mainly because of the increase in productivity fueled by the technology revolution and the dot com/ tech bubble that burst between March of 2000 and the end of the year. The NASDAQ fell from a high of 5000 in March of 2000 and by January of 2001 was down to arround 2500.

I wonder how many of the people crying about “tax cuts for the rich” would work weekends, nights and through holidays if they had the government taking half or more of the money they earned because of their extra efforts?

Every biologist knows that a successful parasite does not kill its host. by unknown

Are more biologists needed i the white house and congress?

Terry -

Excellent article as always. If I may, I would like to recommend adding a couple of sentences to your column: 'Barack Obama has said that higher tax rates are a matter of fairness. With his proposed wealth tax to pay for health care, Barack Obama seems to think that increased tax rates will increase tax revenue. He is wrong on both counts.'

You failed to mention Barack Obama's name even once in the article, even though he's the driving force behind this misguided policy.

Thanks.

The AP examples posted next to your article do little to prove your thesis. I don't see that any of proposed increases would be much of an economic hardship in the examples cited. I also question that real people in those examples, particularly the $800,000 and $5 million examples, would actually pay much of that increase. It is well known that the U.S. Congress never tires of findng ways for their wealthy constituents to evade paying their share of taxes. This is the real problem with our tax system, not the alleged rates levied. The lower your income is, the more likely that you are paying your full share of the tax burden, as you are using more of your post-tax income for food, clothing and a roof over your head rather than financial planning and tax shelters. The real answer is to close tax loopholes. If we are going to say that the highest tax bracket is 35% or 38%, and base our budget on it, then we should make the millionaires pay it. This is why the flat tax has never gotten much traction. Most people realize the far more likely outcome of adopting such a plan is that the super-wealthy would get their tax cut with their loopholes intact, essentialy ensuring that they will pay almost no taxes at all, in addition to getting untaxed perks from their companies like free cars, free healthcare, free financial planning, etc. that none of their working-class employees get.

You mentioned Kennedy's top bracket of 70%. That sounds good to me. When the top rate was cut to 25% in 1925, the stock market crash and depression followed. When Iceland moved to a flat tax of less than 23% in 2007, libertarians cheered. Now Iceland is bankrupt. President Reagan's tax cuts preceded all the savings and loan and merger mania madness. George Bush lowered the top rate, and now we're coincidentally watching the economy smoulder in ruins.
While an upper middle class family might be paying the top rate, someone like Warren Buffet only pays at 15% for much of his income taxed at the capital gains rate. There's also the matter of government subsidies and new regulations that funnel money from the poor and the middle class to the rich and politically connected. Businesses that are too big to fail are collecting government money with one hand and awarding themselves million dollar bonuses with the other.

Dear Terry,
After reading your "Savage Truth on Taxes" regarding tax rates, I am hoping you will go to Wash DC to assist the decision-makers there.... we need you there to help our country and incorporate the proper corrections to solve our economic situation.
Please email your message to President Obama!

Big Government is not a good idea.

Keep up the good work!

Anonymous: There is an example. During the Clinton years, tax rates were increased on the rich and revenue for the government grew at a pace double that of the Reagan years and more than double that of the W years. Savage leaves off that history because it directly contradicts her claim - one that no serious economist makes.
SAVAGE SAYS: The economy received a huge tax cut in the 1990s -- It came from the dramatically increased productivity of technology, which I believe outweighed the Clinton tax increases! The tech boom brought in extra revenues that were far above the "curve"!

It seems to me from all I have read and experienced over the years that the empirical evidence of flat and lower tax rates on income have wonderful economic benefits for all. Yet our left wing pols want to blame low taxes "on the rich" for the current economic climate. If the Republicans in Congress from 2000 to 2006 had not spent the windfall from the Bush tax cuts we would have had balanced budgets to deal with the financial crisis. From 2004 to 2006 revenue to the US treasury increased by $556 billion according to the WSJ editorials. We are heading down and abyss with the current tax policies being proposed by Washington.

Lower taxes more jobs. What could be a better social safety net than 3% unemployment!

I understand what you're trying to say but I don't think your examples are fair. Our highest tax rate is 40-45% in some states, far below the tax rates you listed. Yes, maybe revenues do increase when tax rates are reduced from 91%-71% or from 70%-50% but do you have any example where tax revenues increased when the rate was increased marginally from our exisiting tax % range and only on the top 1% of wage earners?

You're worst example was referring to the 95% tax rate in England at the time.

I always like to know both sides of any topic that's of high interest to me but I feel the examples you're giving are inappropriate precedents.

I ask that you write another article giving more appropriate examples, assuming they exist.

SAVAGE SAYS: I will definitely do that -- write of another example when it happens, which it will. People don't protest higher taxes until they reach the point that they destroy incentives, opportunities. That's when we'll get tax CUTS -- and history shows they work. But until then we'll struggle along, with a slow economcy, people needing help, and budget deficits -- much like England did in the 1970s.

Great piece! I recently finished reading Ayn Rand's great book, "Atlas Shrugged" and I'm growing fearful of what our government (all branches, and local as well) are up to. It's disheartening to read comments like you quoted but I can understand that many weaned on government assistance will only feel more entitled. We need less government, not more. We need less taxes, not more. Leave the productive power to humans to flourish and everyone is better off. Stifle it and we kill that natrual spirit. Like John Galt said in the book...."Get out of my way!".

Great email....as a conservative born and bred Midwestern it is always hard to hear the comment...make the rich pay their fair share of taxes. The folks that spew that comment should be made to prove that the middle class and poor do, in fact, pay the majority of the taxes because they would be hard pressed to do so!!! The answer to all problems in the government is always make the rich pay more so we can GET more from the government.

Subject: Tax Cuts for Dummies
>
> This is a VERY simple way to understand the tax laws. Read on - it does
> make you think!!
>
> Let's put tax cuts in terms everyone can understand. Suppose that every
> day, ten men go out for dinner. The bill for all ten comes to $100. If
> they paid their bill the way we pay our taxes, it would go something
> like this.
>
> The first four men -- the poorest -- would pay nothing; the fifth would
> pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the
> ninth $18, and the tenth man -- the richest -- would pay $59.
>
> That's what they decided to do. The ten men ate dinner in the
> restaurant every day and seemed quite happy with the arrangement --
> until one day, the owner threw them a curve (in tax language a tax
> cut).
>
> "Since you are all such good customers," he said, "I'm going to reduce
> the cost of your daily meal by $20." So now dinner for the ten only cost
> $80.00.
>
> The group still wanted to pay their bill the way we pay our taxes. So
> the first four men were unaffected. They would still eat for free. But
> what about the other six -- the paying customers? How could they divvy
> up the $20 windfall so that everyone would get his "fair share?"
>
> The six men realized that $20 divided by six is $3.33. But if they
> subtracted that from everybody's share, then the fifth man and the sixth
> man would end up being PAID to eat their meal.
>
> So the restaurant owner suggested that it would be fair to reduce each
> man's bill by roughly the same amount, and he proceeded to work out the
> amounts each should pay.
>
> And so the fifth man now paid nothing, the sixth pitched in $2, the
> seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the
> tenth man with a bill of $52 instead of his earlier $59. Each of the six
> was better off than before. And the first four continued to eat for
> free.
>
> But once outside the restaurant, the men began to compare their
> savings.
>
> "I only got a dollar out of the $20," declared the sixth man, pointing
> to the tenth.
>
> "But he got $7!"
>
> "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar,
> too . . . It's unfair that he got seven times more than me!" "That's
> true!" shouted the seventh man, "Why should he get $7 back when I got
> only $2? The wealthy get all the breaks!"
>
> "Wait a minute," yelled the first four men in unison, "We didn't get
> anything at all. The system exploits the poor!"
>
> The nine men surrounded the tenth and beat him up. The next night he
> didn't show up for dinner (or, in the real world, he took his business
> out of the country), so the nine sat down and ate without him. But when
> it came time to pay the bill, they discovered, a little late what was
> very important. They were FIFTY-TWO DOLLARS short of paying the bill!
> Imagine that!
>
> And that, boys and girls, journalists and college instructors, is how
> the tax system works. The people who pay the highest taxes get the most
> benefit from a tax reduction. Tax them too much, attack them for being
> wealthy, and they just may not show up at the table anymore.
>
>

Another excellent column.
The key sentence is raising taxes above a certain level reduces tax revenue. The question is what is that level. Here is data on the Bush tax cuts
These are government receipts and increase in deficit (+ surplus – deficit)
in millions of current dollars. (ignore asterisks )
year********receipts******* increase in deficit
2000****** 2,025,060*******+236,917
2001********1,991,044*******+127,021
2002********1,853,051*******-157,820
2003********1,782,115*******-374,791

SAVAGE SAYS: Aha - re the deficits, you missed the point! You can't wipe out a deficit, if Congress continues to spend MORE each year.

....as usual Terry, you are right on the money concerning taxation. We are truly becoming a nation of have, and have nots, with not very much in the middle. As the have nots continue to grow in our society, I see major social unrest occurring, and a welfare state developing....not a pleasant outlook!

Thanks Terry! I mailed the piece from the Sun-Times to my congressman (Mike Quigley 5th). You are simply the best!
I can't tell you enough how important your take on the issues is. As a real estate agent and financial services representative your insight really helps to make sense of things as they unfold. Thank you for keeping in touch!
Hope to meet you in person sometime,

Tax cuts do increase the cash flow! I was laid off of my job in December but am I really sure getting a new job will help my family's life spendable income? My husband and I are both children of skilled factory workers who put our selves through college. We have been computer programmers for over 30 years, I continued to work while having and raising 3 children. Our house was paid off in Dec 2007, we have 4 cars but payments on only one of them, 2 are 1998 models another a 2000. We have to pay for our childrens college as we make to much for anything needs based and with my income we don't even qualify for a deduction for the college tuition. My son commutes by train and bus (2 hours one way)to UIC which saves us a bundle in tuition and room and board.
I think if I work we will get the tax increases and I know if i don't work we will pay much less in taxes. Why struggle to pay the profit in taxes. Our jobs have been outsourced to India and other coutries in huge numbers because the wages are cheaper. By the way we do get to intemize our taxes even without a mortage, we pay so much in taxes to the state (income tax) and for our nice but modest house (lake county real estate)that we get to itemize but our deductions for taxes get reduced due to current tax laws.
Why should I work to pay for others mortages and school tuition and other things!

Dear Ms. Savage-

I read your column today in the Chicago Sun-Times on why raising taxes doesn't work, and I just wanted to extend my thanks. I find the ever increasing taxation of Americans unfair and moreover un-American! Your article was educating and without political spin: the kind that everyone should read. Thank you for keeping the public informed.

Hi Terry,
WELL SAID! I quickly skimmed your msg & the ltr u rec'vd. May I suggest - In your reply or next article, some how you can mention the idea that -

The folks who DO PURCHASE large homes, big yachts (sp??) do vacations, etc, etc, ARE actually giving lots of "little people" jobs. Yep, jobs on which these "little people" can make THEIR daily purchases of food, clothing, shelter, etc, etc.

I also try to throw that idea out in my various e-mail chat groups - If I HAVE TO pay higher taxes to my Fed, State & city, then sweetie, I will not be able to afford WHATever it is u r trying to sell to me.

Most of the wealthy people are wealthy because their ancestors and they themselves, have managed their money well and not squandered it on foolish things.
Most of the poor people are poor because they do not save and do not use compound interest to their advantage. They want everything to happen overnight and have no discipline as far as money goes. Many have no vision and no plan to get out of the debt trap they've allowed themselves to get into. There are generations of welfare and bankruptcy and accepting handouts... and they seem to feel the world OWES them something.
I am NOT rich, but I do not think that the wealthy should have to pay higher percentage of taxes than I do. Everyone should have to pay their FAIR share.
It is not FAIR to charge one group of people a higher tax just because they have managed their money well, they have studied and worked hard and have been successful. This lady should be ashamed of herself! It is not the wealthy that have caused the economic collapse..... It is all of the people with their hands out, expecting free medical care and welfare, and foodstamps and signing up for every free program available... not to mention the huge number of illegal aliens who are like a giant sponge, sucking life from all of these systems. This lady needs to stop pointing her finger at the wealthy and look at where the REAL problem lies.

Why tax cuts work?
Because they allow the very rich, like yourself, to pay a lot less in taxes while the working class has to pay more. Did the Bush administration tax policies not teach you anything? Obviously, it did not. I haven't seen any of your rich friends become the new Rockefellers or Carneigies by starting philanthropic groups to funnel your monies to help others. Instead, you've purchased gargantuan houses and yachts and have developed a taste for Cristal.

The super-rich should pay their share of taxes because the working and middle classes are already paying enough. You should be ashamed of greed. It has driven this country into the economic collapse it has suffered. But since you're rich, you really don't care. How unpatriotic you are. You deserve to be called every expletive in every language that exists.

I believe that the poeople in this country have failed to look at history, not just of this country but of the world. When we the people decide that it is in our best intrest to tap into the public treauries as we are deserving, that the goverment must provide for us we are doomed. To think that we deserve the fruits of others labors and that we should heavily tax those who are successful only belittle all of us and creates a culture of failure. I currently belive our current administartion is moving us dangeously close to global colapse and world war on a scale of the have and have nots that will make WW 11 seem like a walk in the park. If you remember that it started due to a failure in countries ecomonies also.