Tax the rich the Reagan way
A fundamental tenet of supply-side economics is that taxation should be designed for no other purpose than to collect the maximum amount of revenues which the electorate as a whole wants to pay for the government services it feels it needs. A corollary to this is that a greater share of the taxes should be paid by those most able to afford them. So long as tax policy is designed so that these ends become reality and not merely lofty intentions, our economy and the public welfare will have a better chance of recovery.
In recent years, tax policy took the form of "tax reform" schemes to tax the rich and redistribute their incomes to the poor. Today it is clear that, for all these "reforms," the poor are no better off. Most of the poverty money went to the government administrators of the poverty programs. And the high tax rates failed to collect as much revenue from the rich as they should have. Instead of paying Uncle Sam, the rich found it cheaper to pay their tax lawyers, to put their assests in non-productive tax shelters, to risk tax evasion, or to spirit their money abroad. As a result, this money went neither into the federal Treasury nor into the productive investment that could have offered new jobs and more hope for the poor.
The same was true in the early 1920s and early 1960s, when the top marginal rates were 73 percent and 91 percent respectively. After these were cut to 25 percent and 65 percent, revenues to the Treasury increased immediately and dramatically, with the upper-in-come groups providing the lion's share of the increase. As the public record makes clear: in 1921, these groups paid 28 percent of the tax burden, whereas in 1928 this share increased to 61 percent! There were similar results in the 1960s. In both cases, not only did lower-income groups enjoy a massive tax relief but the economy boomed, creating new jobs and opportunities for the poor. Current projections by the Treasury Department reveal that the tax burden will shift in a similar direction, so long as the Reagan tax cuts in their totality are enacted.
Our country, therefore, has a choice: do we want to enjoy the psychological benefits of "soaking the rich" with high tax rates -- and suffer the inevitable failure to collect more revenues and stimulate growth? Or are we willing to cut high tax rates and let the rich increase their taxablem incomes, thereby collecting more revenues and enjoying the benefits of increased investment, growth, and an expanded tax base?
The message of the last election seems to be the latter. The electorate's passion for egalitarianism is a natural one under certain conditions: those of either no-growth or negative growth. If national income cannot expand, one man's gain must always be at the expense of all the others. Fair and equal distribution is the inevitable demand of the people. But if one man's gain serves to expand the country's wealth, thus contributing to the common gain, and if the opportunity to participate in such wealth creation is open to everyone, then the passion of egalitarian envy and the sense of injustice subside. People are willing to let others improve their own lives so long as everyone has the same chance to give it a try.
Former Congressman Abner Mikva learned this lesson during one of his campaigns. When he talked to some hardhats about George McGovern's plan to increase inheritance taxes on all estates over $150,000, he encountered fierce opposition. When he asked them why they were opposed, since it was unlikely that their estates would ever be so large, they angrily replied: "Well, someday they might!" Translation: people everywhere want the hope of a better life.
The irony of the counterproductive egalitarianism of recent years is that it doesn't hurt the rich. In fact, the rich are the last ones to be hurt by any confiscatory tax policy. The people who arem hurt are: those who need the jobs that could be created by new investment; those who need the welfare benefits that a richm society can afford, as opposed to a poor society; and lastly, those who are trying to get rich -- people on all rungs of the economic ladder whose incentives are stifled, and incomes consumed, by high marginal rates.
In a perverse sort of way, the people who are already rich are actually helped by such a system. They become an entrenched elite that can sit comfortably on top of the economic ladder, their assets safely sheltered. This is contrary to the whole American tradition of social mobility, which is one of the great protectors of our freedom and shields against a system of class stratification and institutional, as opposed to meritocratic, privilege.
The people are tired of the stagnation of the recent era and have signaled for a change. They want the chance to enjoy growth and upward mobility again. They know life canm get better. And they know that there is a way of making people more equal by other means than lowering everyone's standard of living. That way is to raisem everyone's standard of living.
The Reagan administration should not compromise its tax-cut plan. The tax treatment of earned and "unearned" income must be made uniform and the top marginal rates must be cut. Since the President's plan will be attacked as a "rich man's tax cut" no matter what the plan proposes, it should include the one element that has common sense and all historical experience on its side: a tax rate cut that will increasem revenue collect ions from the rich.