Taxmageddon: T - 88 Days And Counting

The American Tax Rocket: Launch date Jan, 2013

The largest tax hikes in the history of America is about to take effect. They will hit families and small businesses in three great waves on Jan. 1, 2013. Wealthy taxpayers will see a big jump in their tax bills under President Obama's latest budget proposal, according to a new independent analysis. 

The First Wave: 

Expiration of 2001 and 2003 Tax Relief. In 2001 and 2003, the GOP Congress enacted several tax cuts for small business owners, families, and investors (later re-upped by President Barack Obama and Democrat Congress in 2010). 

The Happy New Year tax hikes will occur at 12:01 am Jan. 1, 2013: Personal income tax rates will rise. The top income tax rate will rise from 35 percent to 39.6 percent (this is also the rate at which the majority of small business profits are taxed). The lowest rate will rise from 10 percent to 15 percent.

                      REMEMBER; WHO SAYS IT BETTER? 

                               RIGHT TO YOUR FACE: 
                                        RE-ELECT? 

All the rates in between also will rise. Itemized deductions and personal exemptions will again be phased out, which has the same mathematical effect as higher marginal tax rates. So, if you need a chart to see this and where your income falls, then look below and gauge yourself.

                The full list of marginal rate hikes is below: 

           The 10 percent bracket rises to a new and expanded 15 percent
                    The 25 percent bracket rises to 28 percent
                    The 28 percent bracket rises to 31 percent
                    The 33 percent bracket rises to 35 percent
                    The 35 percent bracket rises to 39.6 percent

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. 

The child tax credit; will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. 

Not even the dead are immune, The Middle Class Death Tax; is currently 35 percent with an exemption of $5 million ($10 million for married couples). For those dying on or after Jan. 1, 2013, and there will be a-lot of people that'll live beyond this date, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. Higher tax rates on savers and investors. 

The capital gains tax; will rise from 15 percent this year to 23.8 percent in 2013. 

The dividends tax; will rise from 15 percent this year to 43.4 percent in 2013. This is because of scheduled rate hikes plus Obamacare’s investment surtax. You know Jimmy Carter is somewhere smiling from ear-to-ear saying "Son, you make me proud". 

Second Wave: 

The Obamacare law contains 21 new or higher taxes on American families and small businesses. 

Taxpayers are reminded that the president’s healthcare law is one of the largest tax increases in American history.

Arranged by their respective effective dates, below is the total list of all $500 billion-plus in tax hikes (over the next ten years) in Obamacare, where to find them in the bill, and how much your taxes are scheduled to go up as of today:

Taxes that took effect in 2010:

1. Excise Tax on Charitable Hospitals (Min$/immediate): $50,000 per hospital if they fail to meet new "community health assessment needs," "financial assistance," and "billing and collection" rules set by HHS. Bill: PPACA; Page: 1,961-1,971.

2. Codification of the “economic substance doctrine” (Tax hike of $4.5 billion). This provision allows the IRS to disallow completely-legal tax deductions and other legal tax-minimizing plans just because the IRS deems that the action lacks “substance” and is merely intended to reduce taxes owed. Bill: Reconciliation Act; Page: 108-113.

3. “Black liquor” tax hike (Tax hike of $23.6 billion). This is a tax increase on a type of bio-fuel. Bill: Reconciliation Act; Page: 105.

4. Tax on Innovator Drug Companies ($22.2 bil/Jan 2010): $2.3 billion annual tax on the industry imposed relative to share of sales made that year. Bill: PPACA; Page: 1,971-1,980.

5. Blue Cross/Blue Shield Tax Hike ($0.4 bil/Jan 2010): The special tax deduction in current law for Blue Cross/Blue Shield companies would only be allowed if 85 percent or more of premium revenues are spent on clinical services. Bill: PPACA; Page: 2,004.

6. Tax on Indoor Tanning Services ($2.7 billion/July 1, 2010): New 10 percent excise tax on Americans using indoor tanning salons. Bill: PPACA; Page: 2,397-2,399.

Taxes that took effect in 2011:

7. Medicine Cabinet Tax ($5 bil/Jan 2011): Americans no longer able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). Bill: PPACA; Page: 1,957-1,959.

8. HSA Withdrawal Tax Hike ($1.4 bil/Jan 2011): Increases additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent. Bill: PPACA; Page: 1,959.

Taxes that took effect in 2012:

9. Employer Reporting of Insurance on W-2 (Min$/Jan 2012): Preamble to taxing health benefits on individual tax returns. Bill: PPACA; Page: 1,957.

Taxes that take effect in 2013:

10. Surtax on Investment Income ($123 billion/Jan. 2013): Creation of a new, 3.8 percent surtax on investment income earned in households making at least $250,000 ($200,000 single). This would result in the following top tax rates on investment income: Bill: Reconciliation Act; Page: 87-93.

	Capital Gains	Dividends	Other*
2011-2012	15%	15%	35%
2013+ (current law)	23.8%	43.4%	43.4%
2013+ (Obama budget)	23.8%	23.8%	43.4%

Other unearned income includes (for surtax purposes) gross income from interest, annuities, royalties, net rents, and passive income in partnerships and Subchapter-S corporations. It does not include municipal bond interest or life insurance proceeds, since those do not add to gross income. It does not include active trade or business income, fair market value sales of ownership in pass-through entities, or distributions from retirement plans. The 3.8% surtax does not apply to non-resident aliens.

11. Hike in Medicare Payroll Tax ($86.8 bil/Jan 2013): Current law and changes:

	First $200,000 ($250,000 Married) Employer/Employee	All Remaining Wages Employer/Employee
Current Law	1.45%/1.45% 2.9% self-employed	1.45%/1.45% 2.9% self-employed
Obamacare Tax Hike	1.45%/1.45% 2.9% self-employed	1.45%/2.35% 3.8% self-employed

Bill: PPACA, Reconciliation Act; Page: 2000-2003; 87-93

12. Tax on Medical Device Manufacturers ($20 bil/Jan 2013): Medical device manufacturers employ 360,000 people in 6000 plants across the country. This law imposes a new 2.3% excise tax. Exempts items retailing for $100. Bill: PPACA; Page: 1,980-1,986

13. Raise "Haircut" for Medical Itemized Deduction from 7.5% to 10% of AGI ($15.2 bil/Jan 2013): Currently, those facing high medical expenses are allowed a deduction for medical expenses to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). The new provision imposes a threshold of 10 percent of AGI. Waived for 65 years old or, older taxpayers in 2013-2016 only. Bill: PPACA; Page: 1,994-1,995

14. Flexible Spending Account Cap – aka “Special Needs Kids Tax” ($13 bil/Jan 2013): Imposes cap on FSAs of $2500 (now unlimited). Indexed to inflation after 2013. 

The Next Generation Of Inmate

There is one group of FSA owners for whom this new cap will be particularly cruel and disregarding to parents of special needs children. There are thousands of families with special needs children in the United States and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. Bill: PPACA; Page: 2,388-2,389

15. Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D ($4.5 bil/Jan 2013) Bill: PPACA; Page: 1,994. Now Who's Pushing Granny Over The Cliff?

16. $500,000 Annual Executive Compensation Limit for Health Insurance Executives ($0.6 bil/Jan 2013). Bill: PPACA; Page: 1,995-2,000

Taxes that take effect in 2014:

17. Individual Mandate Excise Tax (Jan 2014): Starting in 2014, anyone not buying “qualifying” health insurance must pay an income surtax according to the higher of the following:

	1 Adult	2 Adults	3+ Adults
2014	1% AGI/$95	1% AGI/$190	1% AGI/$285
2015	2% AGI/$325	2% AGI/$650	2% AGI/$975
2016 +	2.5% AGI/$695	2.5% AGI/$1390	2.5% AGI/$2085

See ya around gramps

Exemptions for religious objectors, undocumented immigrants, prisoners, those earning less than the poverty line, members of Indian tribes, and hardship cases (determined by HHS).Bill: PPACA; Page: 317-337

18. Employer Mandate Tax (Jan 2014): If an employer does not offer health coverage, and at least one employee qualifies for a health tax credit, the employer must pay an additional non-deductible tax of $2000 for all full-time employees. Applies to all employers with 50 or more employees. If any employee actually receives coverage through the exchange, the penalty on the employer for that employee rises to $3000. If the employer requires a waiting period to enroll in coverage of 30-60 days, there is a $400 tax per employee ($600 if the period is 60 days or longer).Bill: PPACA; Page: 345-346

The Congressional Budget Office recently estimated that six million American families will be liable for the tax, and as Americans for Tax Reform has pointed out, 100 percent of Americans filing a tax return (140 million filers) will be forced to submit paperwork to the IRS showing they had “qualifying” health insurance for every month of the tax year. (Bill: PPACA; Page: 317-337).

Combined score of individual and employer mandate tax penalty: $65 billion/10 years.

19. Tax on Health Insurers ($60.1 bil/Jan 2014): Annual tax on the industry imposed relative to health insurance premiums collected that year. Phases in gradually until 2018. Fully-imposed on firms with $50 million in profits. Bill: PPACA; Page: 1,986-1,993

Taxes that take effect in 2018:

20. Excise Tax on Comprehensive Health Insurance Plans ($32 bil/Jan 2018): Starting in 2018, new 40 percent excise tax on “Cadillac” health insurance plans ($10,200 single/$27,500 family). Higher threshold ($11,500 single/$29,450 family) for early retirees and high-risk professions. CPI +1 percentage point indexed. Bill: PPACA; Page: 1,941-1,956

Obama has also signed into law more new or higher taxes on the American people. The full list is below:

21. A 156 percent increase in the federal excise tax on tobacco: On February 4, 2009, just 16 days into his administration, Obama signed into law a 156 percent increase in the federal excise tax on tobacco, a hike of 61 cents per pack. The median income of smokers is just over $36,000 per year.

	First $200,000 ($250,000 Married) Employer/Employee	All Remaining Wages Employer/Employee
Current Law	1.45%/1.45% 2.9% self-employed	1.45%/1.45% 2.9% self-employed
Obamacare Tax Hike	1.45%/1.45% 2.9% self-employed	1.45%/2.35% 3.8% self-employed

Bill: PPACA, Reconciliation Act; Page: 2000-2003; 87-93

Third Wave: 

The Alternative Minimum Tax (AMT) and Employer Tax Hikes. When Americans prepare to file their tax returns in January of 2013, they’ll be in for a nasty surprise — the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include the following.

The AMT will snatch-up over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families — rising from 4 million last year to 28.5 million.*These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to grab a handful of taxpayers.

Full business expensing will disappear. In 2011, businesses can expense half of their purchases of equipment. Starting on 2013 tax returns, all of it will have to be “depreciated” (slowly deducted over many years).

Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

Sorry if you libs cannot swallow the truth or feel that this won't have an adverse impact on the economy....please wake up from your trance and find a clue.     
  
         Do Not Allow The Re-Election Of This President
 

           OR: This Will Be Our Nightmare Come True

Obama Says: "Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it."

Actually: Companies don't get tax breaks for moving anything overseas. Rather, they face double taxation when they try to bring foreign-earned profits back here to America. America is one of the only countries in the world which seeks to tax income coming back home from overseas.

A U.S. company earning a profit in France first pays French corporate income tax. If they leave that money there, they never pay taxes again. 

But if they want to bring that money back home to create jobs, invest in new plant and equipment, or shore up pension plans, they have to pay a second layer of tax to the IRS.

Obama also has said: "From now on, every multinational company should have to pay a basic minimum tax."

They Do: Large companies have very high average effective tax rates. Some liberal groups have cooked the books to make it look otherwise. 

For example, the most common liberal numbers put U.S. taxes paid in the numerator, but worldwide global profits in the denominator. Of course it looks artificially small. We have the highest corporate income tax rate in the developed world (nearly 40 percent when state corporate income taxes are included).

Obama says he wants to "Expand tax relief to small businesses that are raising wages and creating good jobs."

So why does the president wants to raise the top two individual tax rates, which is the tax rate paid by the majority of small business profits? Are you starting to see any of the deceit?

Obama Says: "We have subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that’s rarely been more profitable, and double-down on a clean energy industry that’s never been more promising. Pass clean energy tax credits and create these jobs."

Well: An employer keeping their own money is not a subsidy. Energy companies that manufacture oil don't receive any welfare benefits from the federal government.

Obama also has said: "Right now, our most immediate priority is stopping a tax hike on 160 million working Americans while the recovery is still fragile. People cannot afford losing $40 out of each paycheck this year. There are plenty of ways to get this done. So let’s agree right here, right now: No side issues. No drama. Pass the payroll tax cut without delay."

The fact is; The U.S. House passed a one-year extension of the payroll tax holiday in December. The Democrat Controlled Senate did not. The President's complaint should not be directed anywhere but at Harry Reid, or is Harry doing as he was told?

Obama Says: "Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans."

Here we go again; Congress only put a time limit on the 2001 and 2003 tax relief because of Senate Democrat filibustering. These tax rates have been in place for more than a decade, and extended several times by Congresses controlled by Republicans, Democrats, and split control. 

President Obama himself signed an extension of these tax rates just one year ago. His actions are the exact opposite of what he says.

Here's another silly statement from Obama: "Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, Warren Buffett pays a lower tax rate than his secretary." This is the same lie I've covered and debunked on multiple occasions.

Have you ever noticed how Obama doesn't mention how capital gains and dividend taxes (which drive down average tax rates for the households Obama is referring to) are a second layer of tax on corporate profits?

The real capital gains and dividends rate is closer to 45 percent. 

Second, you can't raise taxes on "the rich" without also raising the tax rate assessed on the majority of small employer profits and on the businesses employing the majority of small business employees.

Third, it's unfair to count both the employer and the employee "half" of Social Security tax payments when comparing Warren Buffett to his secretary — half is notionally paid by the employer, and doesn't directly reduce employee paychecks in the near term; also, there is a Social Security benefit in the future that should be considered.

Obama is also a master at flipping words, read this one: "Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else — like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."

According to Dan Mitchell of the Cato Institute, and everyone else that's ever ran a business, this isn't true. You can prevent all scheduled tax hikes from happening, grow spending at 2 percent annually, and still balance the budget after 10 years.

Obama wants "Tax reform to follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes."

Reality: Capital gains and dividends already face a tax rate of 45 percent when properly understood as the second layer of the 35 percent corporate income tax rate. Enough already; plain and simple,,,He's going to take your money no matter what you make. A broke people in a Broken country will be seen as property or asset, either way, you are enslaved. 

In an attempt to garner bipartisan support Obama Claims his friend Republican Tom Coburn is right: Washington should stop subsidizing millionaires. In fact, if you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions."

Reality: Senator Coburn probably does want to see a net tax hike on small employers, but that doesn't mean they are getting a subsidy. They are keeping their own money.

Obama claims that "If you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up. You’re the ones struggling with rising costs and stagnant wages. You’re the ones who need relief."
President Obama made a "firm pledge" not to raise "any form" of taxes on families making less than $250,000 when running for President in 2008. Yet 16 days into his administration, he raised taxes on smokers, who have an average income of about $30,000 per year.

Then, he raised seven more taxes on these families as part of his jobs-killing Obamacare law.

Obama also says that "We don’t begrudge financial success in this country. We admire it. When Americans talk about folks like me paying my fair share of taxes, it’s not because they envy the rich. It’s because they understand that when I get tax breaks I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference .

Then why if President Obama doesn't want to claim deductions, he doesn't have to. 

If he or Mr. Buffett want to pay more in taxes, they can send a check to the Treasury today.

I could go on forever with this topic, but I have a class to go teach, I'll educate y'all after lunch. 

Will Higher Taxes Save Our Economy?



High Taxes On Your Mind?



François Quesnay

 
François Quesnay and the physiocrats: Around the year 1750, emphasized the importance of property rights in a market economy and he also argued that excessive taxation diminishes output.

It is widely known that high tax rates kill growth, diminish tax receipts, whereas by lowering tax rates, Ronald Reagan was able to turn the economy around which resulted in such rapid growth as to increase tax receipts.

Adam Smith in the book “Wealth of Nations” writes that taxes reduce the incentive to work and firms to employ. Jean Baptiste said “High taxes impoverish the masses without enriching the state and that high taxes are economic suicide, Karl Marx wrote in “DasKapital ”that over taxation is a principle in Europe.”

Here are just ten of the negative effects high taxes have on the over all economic picture:

1. INADEQUATE INCOMES:  The total outcome of all of the effects listed below is a large tax burden. And only workers feel the brunt of this burden, because only workers create wealth. When all of these effects are combined, the tax burden on the average worker is currently about 73 percent of income. So people can't live on their incomes.

2. LOW WAGES: Multiple governments levy so many taxes on businesses that "taxes" is the highest budget items on the ledger sheets of most businesses. These taxes take away some of the money otherwise used to pay wages. So employers can't pay good wages.

3. HIGH PRICES: Multiple governments levy so many taxes on businesses that "taxes" is the highest budget items on the ledger sheets of most businesses. Businesses have to raise prices to get money to pay these taxes. So product prices go up. This leads to inflation.

4. SHODDY PRODUCTS: These taxes take away money otherwise used to improve quality. Instead, businesses must cut corners to make the products and pay the high taxes. Many recalls are the results of businesses cutting too many corners, to save money so they can pay the high taxes.

5. PRODUCT UNAVAILABILITY AND DISCONTINUATION: Because high taxes cost businesses more, they can't provide as many products as they used to be able to. Property taxes make it expensive to stock products with lower quantities demanded. And manufacturers can't afford to produce the low-demand products and also pay their taxes. The result is that people with allergies to the mainstream products can't buy any products they can use.

6. LOST JOBS: Many businesses go bankrupt, because they can't afford to operate after government takes it s cut. Other businesses flee the country, to escape the high taxes. And still other businesses must cut their payrolls to stay within their incomes. The result in each case is the loss of jobs those businesses provided in the economy.

7. FORECLOSURES, EVICTIONS, AND HOMELESSNESS: Because taxes are so high, people who originally entered into mortgages or rental contracts with the ability to pay them now no longer have the money to pay the monthly payments. Landlords also can't pay their taxes and their mortgages, causing the loss of the rental units. And if the taxes are not paid instead, government quickly seizes the property and sells it at auction at a sheriff sale. Thus, high taxes cause foreclosures and evictions.

With the foreclosure or eviction comes homelessness, because these victims of government greed can no longer afford to pay rent or mortgage payments. So high taxes cause homelessness.

8. POVERTY AND HIGH CRIME: Because more people can't afford to live on their incomes, the poverty rate goes up. This causes an additional drain on the budgets of government social programs. This means that each poor person can't get enough to live on.
Many poor people, unable to find jobs because government overtaxed the economy, turn to crime to get the money needed to support their families. This causes the crime rate to go up. And since many of those crimes are robberies, the violent crime rate goes up too.

9. CHRONIC RECESSION: The high taxation takes so much away from the economy that it enters a permanent form of recession. If government tries to boost the economy with increased government spending, the result is stagflation (simultaneous high inflation and unemployment) instead of prosperity. The only cure for stagflation is to cut both taxes and government spending. But this takes time to happen, keeping the effects of overtaxation in place for a time after the overtaxation ends.

10. LOW REAL TAX REVENUES: The permanent recession and losses of jobs caused by the high taxes cause a drop in government revenue, as economic production drops. If government then raises tax rates to recoup the lost revenue, production drops again, and the revenue drops even more. In addition to this, the increase in prices caused by the increased taxation prevents government spending from purchasing as much. So high tax rates cause lower real tax revenue collection.

Government causes its own revenue shortages by wanting more money than it should have - a victim of its own greedy ways. The size of government is naturally limited by the size of the economy around it. Attempts to make government larger than this limit cause economic trouble.

Now that we've examined the effects of higher taxes, let's examine Supplyside Economics:

In order to fully understand this we need to have a working knowledge of "The Laffer Curve"



Dr. Arthur Laffer


The term “supply-side economics” is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be achieved without expansion in output. Virtually all economists accept this proposition and therefore are “supply siders.”


“Supply-side economics” is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the EFFICIENCY of resource use. In recent years, this latter use of the term has become the more common of the two and is thus the focus of this article.

The MARGINAL TAX RATE is crucial because it affects the incentive to earn. The marginal tax rate reveals how much of one’s additional income must be turned over to the tax collector as well as how much is retained by the individual. For example, when the marginal rate is 40 percent, forty of every one hundred dollars of additional earnings must be paid in taxes, and the individual is permitted to keep only sixty dollars of his or her additional income. As marginal tax rates increase, people get to keep less of what they earn.

An increase in marginal tax rates adversely affects the output of an economy in two ways. First, the higher marginal rates reduce the payoff people derive from work and from other taxable productive activities. When people are prohibited from reaping much of what they sow, they will sow more sparingly. Thus, when marginal tax rates rise, some people—those with working spouses, for example—will opt out of the labor force. Others will decide to take more vacation time, retire earlier, or forgo overtime opportunities. Still others will decide to forgo promising but risky business opportunities. In some cases, high tax rates will even drive highly productive citizens to other countries where taxes are lower. These adjustments and others like them will shrink the effective supply of resources, and therefore will shrink output.

Second, high marginal tax rates encourage tax-shelter investments and other forms of tax avoidance. This is inefficient. If, for example, a one-dollar item is tax deductible and the individual has a marginal tax of 40 percent, he will buy the item if it is worth more than sixty cents to him because the true cost to him is only sixty cents. Yet the one-dollar price reflects the value of resources given up to produce the item. High marginal tax rates, therefore, cause an item with a cost of one dollar to be used by someone who values it less than one dollar. Taxpayers facing high marginal tax rates will spend on pleasurable, tax-deductible items such as plush offices, professional conferences held in favorite vacation spots, and various fringe benefits (e.g., a company luxury automobile, business entertainment, and a company retirement plan). Real output is less than its potential because resources are wasted producing goods that are valued less than their cost of production.

EDWARD PRESCOTT



Critics of supply-side economics point out that most estimates of the elasticity of labor supply indicate that a 10 percent change in after-tax wages increases the quantity of labor supplied by only 1 or 2 percent. This suggests that changes in tax rates would exert only a small effect on labor inputs. However, these estimates are of short-run adjustments. One way to check the long-run elasticity of labor supply is to compare countries, such as France, that have had high marginal tax rates on even middle-income people for a long time with countries, such as the United States, where the marginal rates have been persistently lower. Recent work by EDWARD PRESCOTT, co recipient of the 2004 Nobel Prize in economics, used differences in marginal tax rates between France and the United States to make such a comparison. Prescott found that the elasticity of the long-run labor supply was substantially greater than in the short-run supply and those differences in tax rates between France and the United States explained nearly all of the 30 percent shortfall of labor inputs in France compared with the United States. He concluded:

It’s remarkable that virtually all of the large difference in labor supply between France and the United States is due to differences in tax systems. I expected institutional constraints on the operation of labor markets and the nature of the unemployment benefit system to be more important. I was surprised that the welfare gain from reducing the intra-temporal tax wedge is so large.

The supply-side economic policy of cutting high marginal tax rates, therefore, should be viewed as a long-run strategy to enhance growth rather than a short-run tool to end recession. Changing market incentives to increase the amount of labor supplied or to move resources out of tax-motivated investments and into higher-yield activities takes time. The full positive effects of lower marginal tax rates are not observed until labor and capital markets have time to adjust fully to the new incentive structure.

Because marginal tax rates affect real output, they also affect government revenue. An increase in marginal tax rates shrinks the tax base, both by discouraging work effort and by encouraging tax avoidance and even tax evasion. This shrinkage necessarily means that an increase in tax rates leads to a less than proportional increase in tax revenues. Indeed, economist Arthur Laffer (of “Laffer curve” fame) popularized the notion that higher tax rates may actually cause the tax base to shrink so much that tax revenues will decline, and that a cut in tax rates may increase the tax base so much that tax revenues increase.

How likely is this inverse relationship between tax rates and tax revenues? It is more likely in the long run when people have had a long time to adjust. It is also more likely when marginal tax rates are high, but less likely when rates are low. Imagine a taxpayer in a 75 percent tax bracket who earns $300,000 a year. Assume for simplicity that the 75 percent tax rate applies to all his income. Then the government collects $225,000 in tax revenue from this person. Now the government cuts tax rates by one-third, from 75 percent to 50 percent. After the tax cut, this taxpayer gets to keep $50, rather than $25, of every $100, a 100 percent increase in the incentive to earn. If this doubling of the incentive to earn causes him to earn 50 percent more, or $450,000, then the government will get the same revenue as before. If it causes him to earn more than $450,000, the government gets more revenue.

Now consider a taxpayer paying a tax rate of 15 percent on all his income. The same 33 percent rate reduction cuts his rate from 15 percent to 10 percent. Here, take-home pay per $100 of additional earnings will rise from $85 to $90, only a 5.9 percent increase in the incentive to earn. Because cutting the 15 percent rate to 10 percent exerts only a small effect on the incentive to earn, the rate reduction has little impact on the amount earned. Therefore, in contrast with the revenue effects in high tax brackets, tax revenue will decline by almost the same percentage as tax rates in the lowest tax brackets. The bottom line is that cutting all rates by a third will lead to small revenue losses (or even revenue gains) in high tax brackets and large revenue losses in the lowest brackets. As a result, the share of the income tax paid by high-income taxpayers will rise.

As the Keynesian perspective triumphed following World War II, most economists believed tax reductions affect output through their impact on total demand. The potential supply-side effects of taxes were ignored. However, in the 1970s, as INFLATION pushed more and more Americans into high tax brackets, a handful of economists challenged the dominant Keynesian view. Led by Paul Craig Roberts, Norman Ture, and Arthur Laffer, they argued that high taxes were a major drag on the economy and that the top rates could be reduced without a significant loss in revenue. They became known as supply-side economists. During the presidential campaign of 1980, Ronald Reagan argued that high marginal tax rates were hurting economic output, but contrary to what many people think; neither Reagan nor his economic advisers believed that cuts in marginal tax rates would increase tax revenue.

The 1975–1985 period was an era of great debate about the impact of supply-side policies. The supply siders highlighted the positive evidence from two earlier major tax cuts—the Coolidge-Mellon cuts of the 1920s and the Kennedy tax cut of the 1960s. Between 1921 and 1926, three major tax cuts reduced the top marginal rate from 73 percent to 25 percent. The Kennedy tax cut reduced rates across the board, and the top marginal rate was sliced from 91 percent to 70 percent. Both of these tax cuts were followed by strong growth and increasing prosperity. In contrast, the huge Hoover tax increase of 1932—the top rate was increased from 25 percent to 63 percent in one year—helped keep the economy depressed. As the economy grew slowly in the 1970s and the unemployment rate rose, supply-side economists argued that these conditions were the result of high tax rates due to high inflation.

WALTER HELLER



Keynesian economists were not impressed with the supply-side argument. They continued to focus on the demand-side effects, charging that it was irresponsible to cut taxes at a time when inflation was already high. They expected the rate cuts to lead to larger budget deficits, which they did, but also that these deficits would increase demand and push the inflation rate to still higher levels. As WALTER HELLER, chairman of the Council of Economic Advisers under President John F. Kennedy put it, “The [Reagan] tax cut would simply overwhelm our existing productive capacity with a tidal wave of demand.” But this did not happen. Contrary to the Keynesian view, the inflation rate declined substantially from 9 percent during the five years prior to the tax cut to 3.3 percent during the five years after the cut.

Economists continue to debate the precise effects of the 1980s tax cuts. After extensive analysis of the 1986 rate reductions, both Lawrence Lindsey and Martin Feldstein concluded that for taxpayers previously facing marginal tax rates of 40 percent or more, the drop in tax rates caused such a large increase in taxable income that the government was collecting even more revenue from taxpayers in these top brackets. This would mean that tax rates of 40 percent had had a highly destructive impact on economic activity. Joel Slemrod argued that Lindsey’s and Feldstein’s estimates of the extra income due to tax rate cuts are too high because they inadequately reflect people’s shifting of personal income from high-tax-rate years to low-tax-rate years and of business income from regular corporations to partnerships and Sub-S corporations in response to the lower personal tax rates. According to Slemrod, only a small portion of the increase in the tax base resulted from improvements in efficiency and expansion in the supply of labor and other resources.

Even though economists still disagree about the size and nature of taxpayer response to rate changes, most economists now believe that changes in marginal tax rates exert supply-side effects on the economy. It is also widely believed that high marginal tax rates—say, rates of 40 percent or more—are a drag on an economy. The heated debates are now primarily about the distributional effects. Supply-side critics argue that the tax policy of the 1980s was a bonanza for the rich. It is certainly true that taxable income in the upper tax brackets increased sharply during the 1980s. But the taxes collected in these brackets also rose sharply. Measured in 1982–1984 dollars, the income tax revenue collected from the top 10 percent of earners rose from $150.6 billion in 1981 to $199.8 billion in 1988, an increase of 32.7 percent. The percentage increases in the real tax revenue collected from the top 1 and top 5 percent of taxpayers were even larger. In contrast, the real tax liability of other taxpayers (the bottom 90 percent) declined from $161.8 billion to $149.1 billion, a reduction of 7.8 percent.

Since 1986, the top marginal personal income tax rate has been less than 40 percent, compared with 70 percent prior to 1981. Nonetheless, those with high incomes are now paying more. For example, more than 25 percent of the personal income tax has been collected from the top 0.5 percent of earners in recent years, up from less than 15 percent in the late 1970s. These findings confirm what the supply siders predicted: the lower rates, by increasing the tax base substantially in the upper tax brackets, would increase the share of taxes collected from these taxpayers.

Supply-side economics has exerted a major impact on tax policy throughout the world. During the last two decades of the twentieth century, there was a dramatic move away from high marginal tax rates. In 1980, the top marginal rate on personal income was 60 percent or more in forty-nine countries. By 1990, only twenty countries had such a high top tax rate, and by 2000, only three countries—Cameroon, Belgium, and the Democratic Republic of Congo—had a top rate of 60 percent or more. In 1980, only six countries levied a personal income tax with a top marginal rate of less than 40 percent. By 2000, fifty-six countries had a top marginal income tax rate of less than 40 percent.1

The former socialist economies have been at the forefront of those moving toward supply-side tax policies. Following the collapse of COMMUNISM, most of these countries had a combination of personal income and payroll taxes that generated high marginal tax rates. As a result, the incentive to work was weak and tax evasion was massive. Russia was a typical case. In 2000, Russia’s top personal income tax rate was 30 percent and a 40.5 percent payroll tax was applied at all earnings levels. If Russians with even modest earnings complied with the law, the tax collector took well over half of their incremental income. Beginning in January 2001, the newly elected Putin administration shifted to a 13 percent flat-rate income tax and also sharply reduced the payroll tax rate. The results were striking. Tax compliance increased and the inflation-adjusted revenues from the personal income tax rose more than 20 percent annually during the three years following the adoption of the flat-rate tax. Further, the real growth rate of the Russian economy averaged 7 percent during 2001–2003, up from less than 2 percent during the three years prior to the tax cut.

Ukraine soon followed Russia’s lead and capped its top personal income tax rate at 13 percent. Beginning in 2004, the Slovak Republic imposed a flat-rate personal income tax of 19 percent. Latvia and Estonia also have flat-rate personal income taxes.

Supply-side economics provided the political and theoretical foundations for what became a remarkable change in the tax structure of the United States and other countries throughout the world. The view that changes in tax rates exert an impact on total output and that marginal rates in excess of 40 percent exert a destructive influence on the incentive of people to work and use resources wisely is now widely accepted by both economists and policymakers. This change in thinking is the major legacy of supply-side economics.