With the election season coming into the home stretch, the cry of "Tax cuts for the rich!" is ringing out across the land from Democrats desperate to regain power in Washington. Like many other political slogans, its popularity depends on slippery words and sloppy thinking.
First of all, just what does "rich" mean? And does it have any relevance to the kinds of tax cuts at issue?
The recent release of some of Teresa Heinz Kerry's tax records reveals as much about the confusion over this issue as it does about her financial situation. The Kerrys are clearly rich, with several homes, a private jet, and millions of dollars in annual income. Yet they paid just 13 percent of their income in taxes.
That's less than most American pay -- and it is not due to "tax cuts for the rich." It is due to putting much of their wealth into tax-free municipal bonds or other tax-exempt securities. So whether income tax rates are high or low, on rich or poor, makes little difference to them.
One of the major purposes of tax cuts is to get people to take their money out of tax-free securities and invest that money in something that will increase economic activity and create jobs. Since our income tax system is steeply graduated, any across-the-board tax cut will immediately benefit most those who pay most of the taxes -- which is to say, people with higher incomes.
After Ronald Reagan's tax rate cuts in the 1980s first brought out anguished cries of "tax cuts for the rich," it turned out that the federal government collected more tax revenue than ever and that people in upper income brackets not only paid a larger amount of taxes than before, but even paid a higher share of all taxes than before.
How could this be?
This takes us back to slippery words and sloppy thinking. What was cut were tax rates. What went up were tax revenues. At lower tax rates, it paid to take money out of tax shelters and put it somewhere where it was more productive, both for the individual investor and for the economy as a whole.
As the economy expanded and incomes and employment rose, tax revenues rose, despite lower rates being charged for a given income. The incomes of people in the higher brackets went up especially sharply, so the total taxes they paid also went up especially sharply -- again, despite lower tax rates.
Much sloppy thinking about economic issues is based on reasoning as if there is a fixed amount of income, so that someone has to lose whenever someone else gains. The real test of an economic policy is whether it can produce a rising tide that lifts all boats.
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