Magazine article Insight on the News

Tax Tinkering Doesn't Alter Bottom Line

Magazine article Insight on the News

Tax Tinkering Doesn't Alter Bottom Line

Article excerpt

Since the infamous tax increase of 1993, the U.S. economy has grown at the pathetic rate of 2.3 percent. Forecasts for the year ahead project even slower growth, averaging 1.4 percent, with quite a few economists expecting a recession.

The economy obviously is suffocating under the weight of a ridiculously complicated, sadistic tax system. Escalating tax brackets deliberately punish efforts to earn more by producing more -- whether through added work, improved skills or saving.

When it comes to taxes, nobody -- not even the Clinton administration -- openly dares to defend the status quo. Rather than even attempt to confront the taxpayers' complaints, much less do anything about them, the Washington establishment relies on devious statistical techniques for obstructing change. Whenever anyone offers a plan to repair the tax mess, bean counters at the Treasury Department quickly fabricate and leak "estimates," which invariably insist that Americans already are blessed with the best of all possible tax systems. Gullible reporters then echo such Treasury estimates as unquestionable facts, coming as they do from a politically objective and disinterested source.

Fortunately, the mysterious black boxes that crank out these revenue estimates can be discredited easily by one politically inconvenient fact: Ever since 1951, the individual income tax has collected almost 10percent of personal income, plus or minus 1 percentage point. The individual income tax never was lower than 9 percent of personal income nor higher than 11.2 percent. And that has been true every year, regardless of whether the highest tax rate was 91 or 28 percent, and regardless of whether loopholes were cavernous or stingy. The individual income tax briefly touched 11 percent on only two occasions (1969 and 1981), but the economy quickly crumble both times, bringing revenues back down to the 9 to 10 percent norm.

The American people, in their wisdom, appear unwilling to tithe to the federal government more than 10 percent of their income. Few things in life are as predictable as this. Indeed, the regularity is so striking that one just has to put a name on it. After much reflection, I reluctantly have decided, with characteristic humility, to call it "Reynolds' Law." That way, if it ever fails, you can blame me.

How well has Reynolds' Law fared in recent years? After all, two big tax increases in the nineties focused on raising the individual income tax. Individual tax rates (for those who earn more than politicians consider proper for the private sector) were increased in 1990, at great political cost to President Bush, and greatly increased once again in 1993, at great political cost to President Clinton. The economic and political damage is apparent. But what about the effect on revenues?

After the smoke cleared, revenues from the much higher individual income-tax rates had fallen to 9.3 percent of personal income by 1993 -- down from 10.1 percent in 1988, when the highest tax rate still was 28 percent. How is that possible? Because "taxable" income fell to only 43 percent of personal income in 1993 -- down from 51 percent in 1988. The higher the tax rates go, the more income slips out of the tax collectors' grasp.

This is accomplished in many ways, some of them legal. Higher marginal tax rates inevitably encourage taxpayers to make more aggressive and imaginative use of existing gimmicks and to lobby for more. …

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