Tax cuts for the rich

(…) Do the people who keep repeating the catch phrase, “tax cuts for the rich” not know this? Or are they depending on your not knowing it?

Prof. Thomas Sowell:

(…) a phrase that has been a perennial favorite of the left, “tax cuts for the rich.” How long ago was this refuted? More than 80 years ago, the “tax cuts for the rich” argument was refuted, both in theory and in practice, by Andrew Mellon, who was Secretary of the Treasury in the 1920s.

When Mellon took office, there was a large national debt, the economy was stagnating, and tax rates were high, though the tax revenues were still not enough to cover government expenditures. What was Mellon’s prescription for getting out of this mess? A series of major cuts in the tax rates!

Then as now, there were people who failed to make the distinction between tax rates and tax revenues. Mellon said, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue for the Government, and that more revenue may often be obtained by lower rates.”

How can that be? Because taxpayers change their behavior according to what the tax rates are.(…)

For the country as a whole, the amount of money tied up in tax-exempt securities was estimated to be three times as large as the federal government’s expenditures and more than half as large as the national debt.

In short, huge amounts of money were not being invested in productive capacity, such as factories or power plants, but was instead being made available for local political boondoggles, because this money was put into tax-exempt state and local bonds.

When tax rates are reduced, investors have incentives to take their money out of tax shelters and put it into the private economy, creating higher returns for themselves and more production in the economy. Andrew Mellon understood this then, even though many in politics and the media seem not to understand it now.

(…) Between 1921 and 1929, tax rates in the top brackets were cut from 73 percent to 24 percent. In other words, these were what the left likes to call “tax cuts for the rich.”

What happened to federal revenues from income taxes over this same span of time? Income tax revenues rose by more than 30 percent. What happened to the economy? Jobs increased, output rose, the unemployment rate fell and incomes rose. Because economic activity increased, the government received more income tax revenues. In short, these were tax cuts for the economy, even if the left likes to call them “tax cuts for the rich.”

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4 thoughts on “Tax cuts for the rich

  1. I have long contended that no one should leave high school without having taken some economics. A voting population that doesn’t understand the fundamental dynamics of what is a major part of governance, and national policy is one of the most dangerous threats to democracy of modern times.

  2. Thanks for that comment, very well said. Can democracy succeed given an economically ignorant electorate?

    I think that candidates for public office should first have demonstrated elementary competence in economics – “high school” level would be a reasonable standard. In my perfect world Thomas Sowell would design the competence exam 🙂 Simple but essential, competence demonstrated by essay form answers – not by multiple choice memorization.

    In my perfect world, candidates would also demonstrate basic understanding of probability and statistics. I’ve already made my plea for part time legislators – as I think that political-office-as-career is possibly even more dangerous than uninformed voters.

    I don’t know the appropriate Canadian politician who would symbolize that risk. In today’s USA it might be Barney Frank.

  3. Whether we like it or not, elected officials are more often than not, reflections of those that voted for them. Even those that may well know how things work often must pander to the ignorance of their constituents to keep their jobs. Thus, to me, and educated population would beget a more rational legislative body.

    You are very right about the need to teach statistics, again an understanding of this is becoming critical for everyone. I suspect that most of the trouble we are having with pseudoscience driven activists, would vanish if this were the case.

    I’ve always thought that sortition, from a pool of pre-qualified candidates would be the best way to select representatives. I would also see the use of policy juries, where the pros and cons of a particular piece of legislation would be examined by adversarial debate among the interested parties, with the jury (again randomly selected) deciding if the bill was passed or killed.

    However it is unlikely that any real overhaul of government will occur in my lifetime. Good enough is always the enemy of better.

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