In exchange for their protection, the serfs of the Middle Ages had to surrender one-third of their income to their lords; the modern-day serf has to give even more. This stands in sharp contrast, of course, to what the Founders had in mind. If you think about it, our Constitution represents the first North American Free Trade Agreement. In fact, one of the principal failings of the Articles of Confederation was that it allowed the various states to tax the "exports" of other states. Thus, historically, the United States has always been a low-tax country. My, but haven't things changed!
From the founding of the republic in 1776, until the early part of the last century, total government spending at the federal, state and local levels combined rarely exceeded 10% of national income, except during periods of war. At the start of the 20th century, taxes accounted for 5.9% of income; by its end they had ballooned to 33.5%! And now, to hear the sage of Hyannisport talk, you'd think taxes weren't high enough, especially on the "rich," whoever they are.
Teddy Kennedy's timing is perfect, for at about the time he proposed to rollback the miniscule Bush tax-cut, the Internal Revenue Service released its latest data on who actually pays taxes. This offers what Teddy's tutors at Harvard would have called a "teaching moment" — perhaps not for a U.S. Senator from Massachusetts, but certainly for those American taxpayers who are too busy trying to make a living to follow the details. So here are the taxing facts, courtesy of Congress's Joint Economic Committee:
Let's start with the richest of the rich, the top 1% of all earners. In 1999 they earned 19.5% of all adjusted gross income reported to the IRS. Yet they paid a whopping 36.2% of all federal income taxes paid that year. Yes, you read that correctly. The superrich pay in taxes nearly double their proportion of national income.
But wait, the story gets even richer. The top 1% of tax filers are also paying a much higher share than they used to pay. About 20 years ago they paid only 19% of all federal income taxes. By 1991, thanks to the progressive impact of the Reagan round of tax cuts, that share had risen to 24.8%, and by 1999 it was above 36%. The story is the same for the merely filthy rich, the top 5% of all filers, who paid 43.4% of all taxes in 1991, but by 1999 paid 55.5%.
There's a word for this kind of tax system. It's called progressive, though I prefer the term confiscatory. It's exactly what the serfs of Europe had to endure in their time, only with more sleight of hand. What more do liberals like Teddy Kennedy and Dick Durbin want? They already have a tax system in which a mere 5% of all earners pay more than half of all taxes, and they want to soak the rich even more?
Our progressive tax system is based on a principle, the so-called "ability to pay" principle. But it is a wrongheaded principle, and it will produce exactly the same sort of stagnation the Middles Ages were famous for.
By now we should all know that the more heavily we tax incomes, the less people will be willing to work. Growth suffers, and with it output. Marginal workers cannot find employment and unemployment rates rise. People become discouraged and some turn to crime. The problem is, our tax laws are becoming more confiscatory all the time. From 1989 to 1999, the share of total taxes paid by the entire top 50% was largely unchanged. But the share paid by the top 10% of filers jumped by 19%. The share paid by the top 5% leapt by 26%. And the share paid by the top 1% soared by more than 43%.
The Kennedy and Durbin Democrats describe President Bush's tax cuts as a huge drain on the Treasury. That's hogwash. In actuality, the tax cuts are so modest — reducing the top rate to 35% from 39.6%, and not until 2006 — that they'll barely make a dent in Teddy's soak-the-rich paradise. The Bush cuts are so small, they're not even large enough to offset the economic and tax policies that have been raising American tax burdens to near-record levels over the past fifty years. The last time figures were released, the federal tax share of GNP was 20.7%, the highest level since World War II.
The confiscatory cycle begins when economic growth kicks more and more taxpayers into higher and higher tax brackets. This is known as bracket creep, and all the Bush tax cuts have done are offset its inexorable grip on ever more taxpayers. Targeted tax breaks like the personal exemption and the right to itemize deductions, phase-out as income grows. This is a double-whammy, for each new dollar of income is taxed by the ruling marginal rate and then taxed again by the reduction in credits, exemptions, and/or deductions. And don't even get me started on the worst stealth tax of them all — the Alternative Minimum Tax. The Bush tax cuts don't even address these phase-outs until 2009.
And if you think this doesn't apply to you, think again. Kennedy's definition of "wealthy" might surprise you. According to the 1999 IRS numbers, all you had to earn to be considered among the top 25% of all tax filers was a whopping $52,965. As such, you got to pay 83.5% of all taxes. To be among the top 50% of all tax filers required an income of just $26,415. Remember, the 27% marginal tax rate kicks in for single taxpayers at only $27,050 of income.
Many of those average Joes and Janes are tomorrow's "wealthy." According to an analysis done by the University of Michigan, more than 80% of families who started 1975 in the lowest one-fifth of the earning population had, by 1991, attained a middle-class income. An amazing 30% jumped from the lowest-earning one-fifth to the highest-earning one-fifth.
The Kennedy liberals prefer to ignore this truth about income mobility, because it means that their main political claim is false. They want voters to believe that the only people being taxed at these confiscatory rates are the Trumps and the Rockefellers, not the guy next door. But what really happens is that higher rates end up soaking not the rich but the middle class. We all end up paying the same tax rate as the Kennedys, though none of us can afford to sail off Cape Cod.
The Kennedys and the Durbins and the Daschles know what they're doing, of course. By calling for a tax hike, they hope to shift the national debate to the left and make it that much harder to cut taxes any further. Which is why it's so important for us, the Party of Choice, to have our voices heard.
I want to cut income taxes to a maximum of 20%. I want to eliminate the social security tax altogether. I want to eliminate the alternative minimum tax. I want to end the capital-gains tax and the double taxation of corporate dividends. I want to see income taxes eliminated on young people, and on all incomes below $25,000. I want to end the serfdom of the American taxpayer. But I can't do any of these things without your help.
Kudos, by the way, to the Wall Street Journal, source of much of the information included in this essay.