Diary

An Economic and Tax Primer—What Might Have Been

An Economic and Tax Primer—What Might Have Been

 

As the year is coming to a close, we have found ourselves at yet another great teaching point in history and politics.  House Democrats are digging in their heels in a last ditch effort to fight Republicans in extending the so-called “Bush Tax Cuts”.  Their primary method of attack is class warfare, in this example, pitting those of various economic classes against one another and screaming it from the mountaintops.
 
Liberals are clamoring that this proposed tax plan consists of nothing more than tax breaks for the rich at the expense of the rest of us and that our children’s children are paying for the wealthy to have more money.
 
Enough already!  It’s time for an economic and tax primer, based on common sense, that even a liberal can understand.
 
Economic growth is good for a country.  A growing economy produces jobs and those jobs provide money by which families can be sustained and by which goods and services may be acquired.  Those same jobs also produce income upon which federal, state, and local taxes may be levied.  Those tax dollars can then be used to support various government services and institutions.

 

Without economic growth and the resulting tax revenue, the government well runs dry and the government then has to reduce or eliminate certain programs and services.
 
All that said, stick with me as we’re jumping into some numbers, about 70 percent of our nation’s economic growth is produced by consumer spending.  That includes everything from buying a pistol at the sporting goods store to buying an electric car at the dealership.  Practically any and every item or service we pay for in this country feeds into that 70 percent figure.
 
So, it stands to reason that if you’re looking for the biggest bang for your buck economically, then the factor that contributes most to economic growth, consumer spending, needs to increase.
 
How can that happen?  It can occur in one of two ways or a combination thereof.  The first would be for incentives to be given to individuals, either on a temporary or permanent basis, to purchase goods or services.  A recent example would be “cash for clunkers”, designed to temporarily stimulate demand for new automobiles.  A permanent example would be the tax deduction given on mortgage interest, designed to increase home ownership.
 
Temporary incentives are just that–temporary.  They might provide a one-time jolt to the economy, but that’s about all.
 
The other way to increase consumer spending is to provide the consumer with more money to spend, which is most easily accomplished via a reduction in tax rates and has the greater economic effect.  These additional funds are then typically spent on various goods and services.
 
As this additional money is spent, it flows through the economy, supporting various businesses and organizations.  These businesses and organizations then pay their employees and may hire additional employees who then spend money on goods and services.  Hopefully, the cycle continues indefinitely.

Now, again we’re back to some numbers.  Ours is a progressive income tax nation.  That means if you earn more, then you pay a higher income tax rate, or percentage of your income.  You also, therefore, pay a higher amount of actual money.  So, the individual who earns more than the other person and thus is in a higher tax bracket, pays more tax as a percentage of his income and pays more actual dollars, all things being equal.

 

Therefore, it stands to reason that if we want to jumpstart the economy by putting more money into the hands of consumers, the largest economic effect would come from reducing taxes on the higher tax brackets, both in terms of actual dollars and a percentage of their income. This is because, in theory, these folks pay the most dollars of taxes.

 

Not only is this theory, but it’s actually factual.  According to The Tax Foundation, the latest data available, which are reflective of 2008 taxes and income, show the following:

 

-The top 1% of taxpayers earned 20% of total adjusted gross income among all taxpayers and paid 38% of all federal income taxes.

 

-The top 0.1% (10% of the top 1%) of taxpayers earned nearly 10% of total adjusted gross income among all taxpayers and paid 18.5% of all federal income taxes.

 

-The top 5% of taxpayers earned 34.7% of total adjusted gross income and paid 58.7% of total federal income taxes.

 

Now, think of this in reverse.  Suppose someone was not interested in boosting the economy, but wanted to contract consumer spending and thus economic growth.  What might be the best way to do this?  The answer, of course, would be to raise taxes, especially those of the upper income tax brackets.

 

That is exactly what President Obama campaigned on and promised to do back in 2008 and what House Democrats still want to happen—that is for federal income taxes and a host of other taxes to rise for all Americans.

 

Were the “Bush Tax Cuts” to expire, the top tax bracket would have increased from 35% to 39.6%.  The next highest bracket would have moved from 33% to 36%, while the bracket below that would have jumped to 31% from 28%, and the next bracket down would have increased to 28% from 25%.  Furthermore, the 10% tax bracket, would’ve jumped from 10% to 15%.  That move from 10% to 15% would have been the highest tax increase, in percentage terms, of all the tax brackets!  So much for the liberal mantra of taking care of the working class and poor of this country, let alone everyone else.

 

Putting this altogether, how can President Obama and the Democratic Party say with a straight face that they are for a stronger U.S. economy when they have vigorously fought to contract the largest component of economic growth in this country, consumer spending?  They cannot. 

 

Their desires to increase taxes merely reflect a strong desire to redistribute the existing wealth and future wealth of this nation.  It is a lesson worth learning that if the GOP had not won the House majority in the last election and made major inroads in the Senate, then the redistribution of wealth would have most certainly occurred.

 

 

Chad Stafko is a writer and political consultant living in the Midwest. He can be reached at [email protected]