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Does taxing the Rich hurt the economy.

2/27/2014

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If you look at the history of the Federal income tax, you will find that 36 states passed the 16th amendment in 1913 and the 1st income tax was instituted in 1917; somewhat fortuitous timing, since it helped pay for America’s involvement in WWI.  The highest marginal tax rate at the time was 67%, and that was for those who made more than $1.5 million (about $22 million in 2013 dollars).  Over the years, the highest marginal tax rate has fluctuated reaching a high of 94% during WWII (why would you want to work if 94cents of every dollar you made was going to the government).  The first major decline of the top marginal tax rate was during the Kennedy administration when it was reduced from 90% to 70%.  Many economists, myself included, contribute the boom economy of the sixties in part to this tax cut.  The next tax cut came during the Reagan years when the highest marginal rate was reduced to 50% and then down to 28%.  Let’s look at the effect of these tax cuts.


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As you can see from the chart to the left, as the marginal tax rate on the wealthy (top 1%), decreased, the amount of taxes they paid increased significantly.  At the beginning of the Reagan/Bush administration in 1980, the top 1% paid only 17% of all the income taxes collected by the US government.  However, by the end of the Bush administration in 1992, the top 1% was paying 30%.  The logic for this is simple.  The rich are the ones who take risks and start businesses, and an individual is more likely to take a risk if he/she is getting 72 cents back on every dollar of profit after taxes as opposed to 30 cents.  Put in another way, have you ever heard of a poor person hiring someone?

    But that’s not all, if you look at the chart below right, you will see in 2007, that the top 1% paid more income taxes than the bottom 95% of the population.  Currently, as a result of the recession, the top 1% is paying more than the bottom 92%.  If you look at the table,bottom left, from the National Taxpayers Union (their data is from the IRS), you will see that in 2010 (the year with the most recent data), the top 1% paid 37% of all the federal  income taxes collected by the federal government and the bottom 50%, half the population, paid 2%.


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Let’s put another spin on this.

            In a recent CNBC report, Jane Wells reported that the rich don’t pay most of the taxes, they pay all the taxes.  What she included was the earned income credit that low income workers receive (they not only pay no taxes, they get tax dollars back from the government).  If this is included, then the top 20% of income earners pay 92.9% of all federal income taxes the government collects.  The numbers are from the Congressional Budget Office.

To see the video go to http://video.cnbc.com/gallery/?video=3000225936

        Let’s recap; the top 1% pays close to 40% of all income taxes received by the federal government (in 2007 it was 40.2%), they pay more in taxes than the bottom 92% of wage earners, and the top quintile of taxpayers pays literally all the taxes, and as the highest marginal tax rate decreased over the years, the rich paid more in taxes. That Congresswoman Shea-Porter, meets my definition of the rich paying their fair share of taxes.


Addendum:     Nothing infuriates me more then when someone says to me that Clinton raised taxes in 1993, and as a result the economy of the 90’s flourished.  Taxes had nothing to do with the 90’s.  This decade was unlike any other decade of the century; technology, and hence the economy, flourished.  In 1992, AOL had 200,000 members, by 1996, they had 40 million.  Everyone was buying computers, cell phones and any other information technology they could get their hands on.  Worker productivity skyrocketed and unit costs plummeted.  By the end of the decade, there were 30,000 dot com businesses.  That is what drove the economy of the 90’s.



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    John Tommasi is a retired Senior Lecturer of Economics & Finance from Bentley University and  the University of New Hampshire.

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