Rich people are government?s best friend

Larry Kudlow
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Posted: Jun 07, 2005 12:00 AM
It is impossible that the Bush tax cuts of June 2003 contributed to relatively lower tax payments by the very richest Americans in 2002. But New York Times writer David Cay Johnston conveniently avoids this fact in his Sunday front-page article, ?Richest Leaving Even the Rich Far Behind,? which used tax-payment data that ended in 2002 to extend the class-warfare argument. Is this just more garden-variety Bush-bashing from the newspaper of record?

I?d also like to know why Johnston never mentions the fact that the wealthiest Americans suffered the most in the stock market plunge and asset deflation of 2000-02. One reason the richest seemed to pay less in taxes during this period is that they were the hardest hit during the deflation.

Johnston singles out the top 145,000 taxpayers who comprise the top 0.1 percent of income distribution in 2002. Their average income was $3 million, two-and-a-half times the inflation-adjusted $1.2 million that the group reported in 1980. My gosh -- how dare they be successful earners and investors?

Over that 22-year span, this group probably included the very same people who launched tens of thousands of new companies that hired roughly 40 million net new workers that completely revolutionized the U.S. economy through unbelievable breakthroughs in the realms of information technology, communications, finance, health care, and retailing.

Should we go out and shoot these 145,000 for their success?

These entrepreneurs use their God-given talents within the Reaganesque free-market framework that deregulated, slashed tax rates, and provided the first strong dose of economic incentives since the 1920s. A rising economic tide over the last 20 years has lifted living standards, productivity, and employment throughout America. Everyone got richer, with a full $39 trillion in new wealth created during this period. That?s why the unemployment rate has been averaging 5 percent over the past 10 years, with non-financial productivity running about 5 percent and inflation virtually nil.

Of course, the bulk of Bush?s 2003 tax cuts on dividends and capital gains will help people with the highest incomes, but they pay the most taxes in the first place. The tax cuts will also help the entire 100-million-strong investor class -- about 50 percent of U.S. households. But when the new IRS income statistics for 2004 and 2005 are published, we will undoubtedly find that lower tax rates -- particularly on investment -- have again generated much higher tax collections for the so-called richest among us. Already, for the twelve months ending April 2005, non-withheld tax receipts (read capital gains and dividends) rose an astronomical 36 percent.

There?s nothing new here. Through 2001, a tiny one-tenth of 1 percent of U.S. taxpayers generated a hefty 16 percent of total tax collections. That?s brainpower plus initiative, aided and abetted by the incentive to keep more of what you earn and thus work with more intensity and purpose. Meanwhile the top 1 percent paid 34 percent of tax collections, the top 5 percent paid 53 percent, the top 10 percent paid 65 percent, the top 25 percent paid 83 percent, and the top 50 percent paid 96 percent. These ?rich people? are government?s best friend.

This week in the Wall Street Journal, Gotz Aly, a professor of Holocaust research at the University of Frankfurt, talked about the ?rotten achievement? of the German economy, where policymakers obsess over the ?equalization of living standards.? Germans have an ?equality sickness? that makes them dependent on the welfare state. Is that what David Cay Johnston has in mind for America?

Nations engaged in punishing the rich and leveling income and wealth through high taxes and resource redistribution have always failed. These were the goals of the socialist and communist regimes following WWII, in particular old Russia and its satellites. The size and scope of these failures, and the related deprivation of democracy and human rights, ultimately led to the downfall of communism and the rise of free-market capitalism, with its attendant privileges of free-election democracy and sweeping new human rights. This very transition is now occurring in the once darkest corners of the Middle East.

The economic failure of income- and wealth-leveling is more and more apparent today. The stagnant economies of socialist Old Europe are falling further and further behind the free-market capitalist models of the U.S. and Britain. Milton Friedman?s great 1962 book, ?Capitalism and Freedom,? should be read by all inhabitants of Old Europe. He offered a way out. Twenty-odd years later, Ronald Reagan and Margaret Thatcher put Friedman?s ideas into political and economic action. The startlingly positive results are being copied by India and China, if not inevitably by France, Germany, and Italy.

This is a thought for the ages ? and for Mr. David Cay Johnston.