Roll Back the Reagan Tax Cuts

Monday 22 November 2010

by: Thom Hartmann, Berrett-Koehler Publishers | Book Excerpt

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This is the third installment of Tom Hartmann's groundbreaking book, "Rebooting the American Dream: 11 Ways to Rebuild Our Country." (Image: Berrett-Koehler Publishers; Edited: to)

You must pay the price if you wish to secure the blessings.

- Andrew Jackson

When I was in Denmark in 2008 doing my radio show for a week from the Danish Radio studios and interviewing many of that nation’s leading politicians, economists, energy experts, and newspaper publishers, one of my guests made a comment that dropped the scales from my eyes.1

We’d been discussing taxes on the air and the fact that Denmark has an average 52 percent income-tax rate. I asked him why people didn’t revolt at such high taxes, and he smiled and pointed out to me that the average Dane is very well paid, with a minimum wage that equals roughly $18 per hour. Moreover, what Danes get for their taxes (that we don’t) is a free college education and free health care, not to mention four weeks of paid vacation each year and notoriety as the happiest nation on earth, according to a major study done by the University of Leicester in the United Kingdom.2

But it was once we were off the air that he made the comment that I found so enlightening.

“You Americans are such suckers,” he said. “You think that the rules for taxes that apply to rich people also apply to working people, but they don’t. When working peoples’ taxes go up, their pay goes up. When their taxes go down, their pay goes down. It may take a year or two or three to all even out, but it always works this way—look at any country in Europe. And that rule on taxes is the opposite of how it works for rich people!”

My Danish guest was right. So before we get into the larger consequences of tax increases or tax cuts for the nation’s economic health, let’s parse this business about what tax increases or cuts mean for the rich and for the not-so-rich.

Unequal Taxation and the Conservative Spin

If a wealthy person earns so much money that he doesn’t or can’t spend it all each year, when his taxes go down his income after taxes goes up. This is largely because there’s little or no relationship between what he “needs to live on” and what he’s “earning.” Somebody living on $1 million per year but earning $5 million after taxes can sock away $4 million in a Swiss bank. If his taxes go up enough to drop his after-tax income to only $3 million per year, he’s still living on $1 million per year and socks away only $2 million in the Swiss bank. Although his lifestyle doesn’t change, his discretionary income—some call it “disposable” income—goes down when his taxes go up and vice versa.

Most working Americans believe that their taxes and income work in the same way—something the right-wing think tanks and media want everyone to believe. So average Americans tend to support tax cuts because they think they’ll have more money in the bank as a result, but if their taxes go up, they’ll have less money in the bank. It’s pretty intuitive, and over the short term, it’s true.

But it never plays out that way. Our own experience—and the experience of the Danes and other Europeans—shows a completely different trend.

Unlike the rich, most working people spend pretty much all of what they earn—their discretionary income is extremely limited and in many cases zero. Savings rates in the United States among working people typically are small—1 to 5 percent. So the take-home pay that people have after taxes—regardless of what the tax rate may be—is pretty much what they live on.

As economist David Ricardo pointed out in 1817 in the “On Wages” chapter of his book On the Principles of Political Economy and Taxation, take-home pay is also generally what a person will work for. Employers know this: Ricardo’s “Iron Law of Wages” is rooted in the notion that there is a “market” for labor, driven in part by supply and demand.

So, if a worker is earning, for example, a gross salary of $75,000, his 2009 federal income tax would have been about $18,000, leaving him a take-home pay of $57,000. Both he and his employer know that he’ll do the job for that $57,000 take-home pay.

So let’s take a look at what happens if the government raises income taxes. For our average $75,000-per-year worker, his takehome pay might decrease from $57,000 to $52,000. So, in the short run, increased taxes have an immediate negative effect on him.

But here comes the part the conservatives don’t like to talk about. Our own history shows that within a short time—usually between one and three years—that same worker’s wages will increase enough to more than compensate for his lost income. Former Federal Reserve Chairman Alan Greenspan used to be hysterical about this effect—he called it “wage inflation”—and the Wall Street Journal and other publications would often reference it. It’s one reason why as income taxes increasingly hit more and more working people in the United States between the 1950s and 1981, income itself steadily went up, too.

Similarly, when the government enacts a tax cut, workingclass people’s taxes go down; but sure enough, over time, their wages also go down so their inflation-adjusted take-home pay remains the same.

Consider all the “tax cuts” working people have gotten over the past 30 years, from Reagan, Clinton, and Bush Jr. In each case, within a year or two working people’s wages were the same or lower. On the other hand, when working-class people’s taxes went up, during the Truman, Eisenhower, Johnson, and Nixon administrations, their wages went up in the following years, too.

We’ve seen both happen over the past 80 years, over and over again.

When it comes to the rich, though, it is the “top marginal tax rate” that matters most. That marginal tax rate applies to each bracket, and for 2009 taxes it was as follows:

Annual Income Marginal Tax Rate
Less than $8,350 10%

$8,350 to $33,950 15%

$33,950 to $82,250 25%

$82,250 to $171,550 28%

$171,550 to $372,950 33%

$372,950 and higher 35%

So what happens if that top marginal tax rate goes up from its current 35 percent to, for example, the 1980 rate of 70 percent?

For the more than 120 million American workers who don’t earn more than $372,950 annually, it won’t mean a thing. But for the tiny handful of millionaires and billionaires who have promoted the Great Tax Con, it will bite hard. And that’s why they spend millions to make average working people freak out about increases in the top tax rates.

To read more: http://www.truth-out.org/roll-back-reagan-tax-cuts65332

This article was too long to post all of it here.

It is very interesting and insightful.

TAX we cant help it...we have to accept what the goverment offer.