Raising Revenues – a Modest Proposal

As we continue to grapple with the hard math of not only balancing the budget, but also paying down the national debt, I think it’s fair to say that cutting Federal spending alone will not resolve the equation.  While it is certainly a start, the only other way to balance the book is to raise revenues.

Just the mention of raising taxes in America appears to be a sure political death knell.  Politicians that advocate raising taxes seldom win elections, while sitting politicians that consider raising taxes often fail to retain their seats.
Last year President Obama signed the Tax Relief, Unemployment Insurance, Reauthorization, and Job Creation Act of 2010which is a very fancy name for the continuation of the Bush Tax Cuts for an additional two years.  The cost of passing this bill added an additional $800 billion to the national debt.  We, as a country, chose to borrow $800 billion for the next year rather than raise taxes on households earning more than $250,000 a year – after deductions!
Late in the debate, when compromise was no longer an option, some Democrats floated the idea of raising the threshold on earnings for tax relief.  A round figure of $1 million was proposed (vice $250,000), and yet soundly rejected by Republicans.  Our conservative leaders argue that a restoration of the 2000 tax rate will “cripple” job creation in this country – especially as we claw out of the last recession.
Here’s the rub – the economic principles embraced by the Republican party for the past 30 plus years do not work!  Period.  Trickle down economics, or the idea of providing the wealthy with more money means more jobs for the rest of Americans is simply a lie.  Those that choose to espouse it are either lying to themselves (and their constituents) or worse, if they actually believe it, they belong in the Special Olympics and not in Congress.
You can look up the economic data for the last decade – it represents the slowest Gross Domestic Product growth in modern American history – this all while the Bush Tax Cuts were supposed to generate more jobs, and in conjunction, more taxpayers to raise revenues.  Compare and contrast with the 1990’s during the onerous Clinton tax years, when Clinton raised taxes in 1993 the Republicans, as they always seem to do, cried (no, John Boehner was not in the House at the time) that it would kill the economy and destroy jobs.  See if any of these sound familiar:
  • Rep. Newt Gingrich (R-GA), February 2, 1993: We have all too many people in the Democratic administration who are talking about bigger Government, bigger bureaucracy, more programs, and higher taxes. I believe that that will in fact kill the current recovery and put us back in a recession. It might take 1 1/2 or 2 years, but it will happen. (Congressional Record, 1993, Thomas)
  • Rep. Bob Goodlatte (R-GA), July 13, 1993: Small businesses generate the bulk of this Nation’s new jobs. And they will be the hardest hit by the Clinton tax-and-spend budget. Because, when you raise taxes, you kill jobs. (Congressional Record, 1993, Thomas)
  • Rep. Christopher Cox (R-CA), May, 27, 1993: This is really the Dr. Kevorkian plan for our economy. It will kill jobs, kill businesses, and yes, kill even the higher tax revenues that these suicidal tax increasers hope to gain. source
The Clinton tax hike was unofficially known as the Deficit Reduction Act.  Deficit Reduction Act.  Deficit Reduction Act – let’s say it over again a few more times.  We must reduce the budget deficit now, but we also must begin generating budget surpluses that can begin addressing the principal of the national debt (remember – $14 trillion and rising…).  
The GOP was wrong in 1993 and they continue to be wrong today.  Cutting taxes on the wealthiest of Americans has nothing to do with crippling small business, as we’re often told.  Please find five small business owners that have taxable earnings of over $1 million a year – I dare you.  If you can find them, I guarantee they will take a slight pay cut on earnings to just under that $1 million cap (or find a way to increase charitable donations).  Not only that, but in today’s global economy, new job growth – even by American businesses – does not favor the American economy!  New job creation is tracking the emerging markets – China, India, anywhere but here.  All the Republicans are doing is simply providing more capital to be invested in foreign labor markets.  They are able to get away with this heinous absurdity for two reasons – middle-American anger at government and “excessive” taxation and value voters that tend to affiliate with Republicans based on their religion.  For additional reading on this issue click here.
If we would have made hard decisions in the last Congress, instead of kicking the problem down the road for another year or two, we might have had an opportunity to balance the budget this year.  Had the government taken in $800 billion in revenues rather than borrow it, gross receipts would have been pushed to approximately $3 trillion.  Had Congress done their job, they could have cut roughly $700 billion in spending this year.  $800 billion plus $700 billion equals $1.5 trillion – the amount of money we the public will borrow in 2011 to run the government!  While this may simplistically fix this current years’ budget, this article does not even begin to address the systemic problems with mandatory spending items such as Social Security and Medicare that will both require massive reform before long term budget issue can be resolved.
There are options for generating revenue.  One that is readily available is to declare victory on the War on Drugs.  We currently spend $15 billion a year on drug enforcement.  In 2009 1.6 million arrests were made for “drug abuse violations.”  The money we spend on enforcement, court costs, incarceration costs, rehabilitation costs, etc. could easily be compounded by the legalization of marijuana and the taxation and regulation of its sale and use.  While I’m sure there are numerous studies available on the cost benefit analysis of legalization, it is probably a conservative estimate that the government could realize a net savings of well over $100 billion by adopting a legalization approach.
Another area of untapped revenue is prostitution.  There is limited available data on the revenue models for prostitution, but in Nevada, where the practice is legal in 10 of the state’s 17 counties, it accounts for roughly 25% of county revenues in taxation, licensing and fees.  While Nevada does not have a state income tax, taxation on prostitution is nearly an annual pastime.  In 2009 Nevada proposed a $5 tax on legal sex acts that was to generate an estimated $2 million in government revenue.  Some brothels are required to purchase operating licenses for up to a $100,000 fee as well as annual licensing fees.  Societal benefits such as regular testing for sexually transmitted diseases, proof of age and/or citizenship for prostitutes could also cut the rate of STD transmissions, minors involved in the sex trade as well as human trafficking.  Over 70,000 non-violent arrests involving prostitution were made in 2009.  Again, the net cost benefit realized between enforcement and legalization would likely lead to tens of billions, if not $100 billion annually.
Ultimately, the budget is a reflection of the country’s priorities and values (as well as the interests of well-funded lobbyists).  We can continue pretending that we are conducting a war on drugs, or show our disapproval of prostitution by making it illegal, but both of these activities will continue unabated long after we are gone from this earth.  Prostitution didn’t earn the moniker “the world’s oldest profession” without reason.  As soon as we place more value on the fiscal health of the United States than we do in punishing people for sex and drugs we can begin to move forward down a path of fiscal responsibility.  I find it amazing that the same people that scream for less government and personal liberties and freedoms are always the ones that demand the government take action to protect the citizenry from sex, drugs, and homosexuals.  Think about it for a moment…
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5 Responses to Raising Revenues – a Modest Proposal

  1. Steve says:

    There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and "rich" taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden – a consequence that should lead class-warfare politicians to support lower tax rates.Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to "soak the rich," the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.1) Lower tax rates do not mean less tax revenue.The tax cuts of the 1920sTax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.According to then-Treasury Secretary Andrew Mellon:The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.The Kennedy tax cutsPresident Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. Recognizing that high tax rates were hindering the economy, President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).According to President John F. Kennedy:Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

  2. Steve says:

    The Reagan tax cutsThanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).According to then-U.S. Representative Jack Kemp (R-NY), one of the chief architects of the Reagan tax cuts:At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.2) The rich pay more when incentives to hide income are reduced.The tax cuts of the 1920sThe share of the tax burden paid by the rich rose dramatically as tax rates were reduced. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.The Kennedy tax cutsJust as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those making over $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.The Reagan tax cutsThe share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.Harmful Spending & ComplexityLower tax rates are important, but they are not the only critical issue. Both the level of government spending and where that money goes are very important. And even when looking only at tax policy, tax rates are just one piece of the puzzle. If certain types of income are subject to multiple layers of tax, as occurs in the current system, that problem cannot be solved by low rates. Similarly, a tax system with needless levels of complexity will impose heavy costs on the productive sector of the economy.

  3. Steve says:

    Yes, i read and studied all of this information. I will agree, that under a Demcrat controled congress and house, that my Man Ron, did, spend too much. But, i will contend, And, beleive, it was to distroy the evil of the Soviet Union. Which he did.

  4. zak says:

    @Steve, you are ignoring all of the tax increase enacted by reagan. also, your numbers are wrong wrt government revenues during this period. they did not increase 99%, it was closer to 50%, and this figure ignores inflation and population growth. it was nothing impressive, especially when compared to the gains made under clinton. as to the fact that the upper .1% of taxpayers contributions increased, take a look at income growth during the same period. the easiest way to relate to changes in wages and taxes is actually simple, if painful to supply-siders. during the 50's and 60's, one wage earner could raise a family. now, it takes two wage earners. so no matter what anyone says about taxes and exemptions and productivity, the fact is that the middle class has been systematically destroyed by reaganomics. of course, historically, the middle class has not existed for that long. taking the long view, slavery is actually a much more common feature of the economy. so thanks a lot, boomers and gen-x, for selling us all back into wage slavery!

  5. Sean Asbury says:

    I love it when a Wall Street Giant weighs in! 🙂

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