Taxation In America

I recently had a discussion with some friends about taxation in this country. I was making the point that the left's obsession with taxing the high income earners is extremely dangerous to our economy. I pointed out that, when left unimpeded, liberals have imposed tax rates upwards of 90% on the highest tax brackets. The response from my friends was unanimous disbelief. They couldn't imagine that anyone could have ever been taxed at such a high rate. So, for those who share their sentiments, take a look at some historical data from the IRS. Here's a table of tax rates since 1913 when the income tax was instituted.

In 1944 and 1945, the tax rate for the top bracket (which was $200,000) was 94%! Of course, that was in a time of war so, if there ever was an excuse, that was it. However, from 1951 to 1963, the rate was 91% (with a top bracket of $400,000). Now, I'll admit that in those days, earning $400,000 a year was a heck of a lot harder than earning that much now. But the point is that we can't just think of today's top rate of 38% as somewhere near the ceiling that the government might impose. It can get A LOT higher. Furthermore, this kind of taxation doesn't hurt the really rich people, it hurts those who make high salaries and it hurts small business owners.

It is critical to recognize that people like Teresa Hienz Kerry don't pay these high tax rates. They have CPAs who know the tax laws and advise them on how best to shelter their wealth from taxation. The people who pay these rates are people who are at the top of their income earning years. (Today's top tax bracket is $330,000, which isn't anything compared to $200,000 in 1944). These are executives of major companies and they are owners of subchapter S corporations (small businesses). The problem with taxing these people at such high rates is that it creates an incentive for them to do other things to obtain income. Why work hard to get to earn that great salary or generate that much revenue for your company when Uncle Sam will come along and take most of it away? In short, high taxation impedes personal excellence. This, more than anything else, hurts the overall economy.

It is the excellent, the high achievers, who create jobs. They're the ones who take the risks to start businesses (which require employees). When the payoff isn't there, they stay home, and when they stay home, everyone suffers. So what are we to do?

I'm on board with abolishing the IRS all together and instituting a consumption tax. Check out www.fairtax.org for details. All purchases would be taxed at a 23% rate. Every American would then get a monthly check from the government that would cover the taxes associated with the basic necessities of life. The end result is that the government would generate far more revenues than it does today and all this talk about taxing the rich more than the poor would go away. Furthermore, when the costs of taxation, which are built into the costs of all consumer products, were eliminated, the cost of those products would go down. In the end, we might pay a bit more for what we buy, but we'd have a great deal more money to spend. Most important, we'd get to decide when and how much we're taxed. Aside from removing the complexity of tax season and the pain of seeing the withholding lines of our pay stubs, the benefits would be immense.

First of all, when our products become cheaper because the imbedded taxes have been removed, we'll be much more competitive in international markets. No other country on the planet would be able to compete with us. This would drive up demand and create millions of new jobs. Secondly, we can't forget that criminals would be taxed, as well. Imagine how much revenue Uncle Sam misses because criminals don't report the income they receive from their criminal activities. But they buy stuff, nice stuff, and lots of it. We'd all get to cash in on that.

In the end, taxation is a very real problem in America. Politicians need progressive income taxation because it is their lifeline to power. If we take this away from them, we take away the class-warfare rhetoric and move toward holding them responsible for looking out for us and not for themselves. I can't see any reason why we shouldn't do this.