By Ed Ingold and Nancy Thorner -
Governor Romney's tax plan is to cut the maximum tax rates by at least 20% across the board, while remaining revenue neutral in the short term. This will be achieved by reducing the type and amount of deductions which can be applied to reduce the tax liability. The Democrats were quick to point out that "the math doesn't work." The same criticism was echoed by the liberal media. But does the liberal "catch phrase" really have any merit, or is it just another way to malign Romney through dumping on his tax policy?
In that Congressional budget-scoring rules are conservative about anticipated growth from tax cuts because economists disagree over how much they spur the economy, using history as a guide will prove otherwise. The best predictor of the future is to look at the bipartisan tax cut track record and notice that no tax cut has ever reduced tax revenue. Over the past 50 years four presidents have cut taxes and seen an average tax revenue increase of $675 trillion a year.: The Kennedy Tax Cut of 1963 (Source: Heritage Foundation); The Reagan Tax cut on 1981 (Source: Heritage Foundation); the Clinton Tax cut of 1997 (Source: Forbes); and the Bush Tax cut of 2003 (Source: The Washington Times).
First of all, nobody pays the maximum tax rate. After deductions, the effective rate is much lower. For middle income taxpayers, the effective rate is on the order of 10% to 12%. The maximum rate for corporations is 35%, which with additional state and local taxes ups taxes to an incredible 40.9%, the highest in the civilized world. That said, the effective corporate tax rate is closer to 22.5%, still high by international standards. http://www.aei.org/article/economics/fiscal-policy/taxes/report-car... a href="http://www.aei.org/article/economics/fiscal-policy/taxes/report-card-on-effective-corporate-tax-rates/%3E">http://www.aei.org/article/economics/fiscal-policy/taxes/report-car...;
Since the problem is bigger than most people can grasp -- and there are so many diverse interests and situations -- it's best to start with one aspect, corporate taxes, and go from there. The Romney-Ryan ticket proposes to reduce the statutory corporate tax rate from the current 35% to 25% (http://www.mittromney.com/issues/tax a href="http://www.mittromney.com/issues/tax%3E">http://www.mittromney.com/issues/tax>; ).
How does the math work? How can you remain revenue neutral by simply cutting deductions? Simple. Deductions already lower the effective tax rate to less than what the Romney-Ryan ticket proposes, so there is wiggle room. As to which deductions to limit, that is a matter for the President and Congress to decide, which will require a bi-partisan approach. As noted earlier on, it's happened before with presidents Jack Kennedy, Ronald Reagen, Bill Clinton and George W. Bush. You set goals, not quotas, and work out the means to accomplish those goals together.
The same approach will work as we go down the line for all individuals regardless of income levels. The goal is to be revenue neutral, and progressive, meaning that wealthier individuals will continue to pay more than those of lesser financial means. If the top 10% of the earners pay 80% of the taxes presently, that ratio will continue.
Why then reduce the tax rates, the maximum amount owed to the government? In simplest terms, lowering the tax rate dramatically increases the incentive to succeed. The incentive is there because you get to keep more of your earnings in excess of the deductions. That leaves more money to invest in growth, hire more workers, and because you make more, the government's revenue increases too. Everybody gets a bigger piece of pie, because the pie is growing.
Without confidence in the future, people put the money they don't need to live on into the safest place, rather than using that money to make loans, grow their businesses and hire people. At present, equity (stocks) give more return than debt (bonds), so the market flourishes. It flourishes not because the economy is healing, but because it is sick. The stock market is near an all time high because of inflation, created, in part, by unrestricted printing of money by the Fed. Given that interest rates are at an historic low, it is only natural that many investors look to the stock market as the wise choice for their hard earned money, rather than investing in bonds or mortgages.
The market is fundamentally a commodity, like oil, gold and corn. If money is worth less, commodities cost more. Since we tend to measure wealth by the stock index, all looks good. But it's an illusion brought on by deflation of the currency, and encouraged by those who work at the pleasure of the government.
Since debt instruments are suffering, there is no money to lend to individuals who wish to buy houses (or a market in which to sell them), corporations to expand, or consumers to buy the things they want and need. States and cities suffer because the rate of return on their bonds is too low to attract buyers, despite the tax deductions. The situation is only compounded when the same governments refuse to clamp down on runaway pension and benefit packages for public employees, raising the risk of defaulting or seeking bankruptcy protection. Who would have imagined cities going bankrupt and defaulting on their obligations to bondholders and their own employees? The current administration hopes to improve this situation by legislating and regulating against risk taking. This is doomed to failure, because without risk, there are no gains. That applies to heroes, explorers and corporations alike.
Anything which reduces risk and investment will eventually diminish wealth for everyone. To tax "the rich" for what they own, rather than what they make, and to discourage investment, is like forcing a farmer to use his seed corn to feed the family. You eat well for a while, but starvation is just over the horizon.