Taxes

In a commentary published at http://www.jewishworldreview.com/ Thomas Sowell made the following interesting points regarding the effects of taxation on our financial behavior:

The biggest immediate tax issue is whether the Bush tax cuts will be extended for everyone. Here, as elsewhere in politics, sheer hogwash reigns supreme.

Nancy Pelosi claims that the “tax cuts for the rich” cannot be continued because it would be “too costly.” Although former Republican Majority Leader Dick Armey says, “Demagoguery beats data” in politics, here are some data anyway.

The first big cut in income taxes came in the 1920s, at the urging of Secretary of the Treasury Andrew Mellon. He argued that a reduction of the tax rates would increase the tax revenues. What actually happened?

In 1920, when the top tax rate was 73 percent, for people making over $100,000 a year, the federal government collected just over $700 million in income taxes– and 30 percent of that was paid by people making over $100,000. After a series of tax cuts brought the top rate down to 24 percent, the federal government collected more than a billion dollars in income tax revenue– and people making over $100,000 a year now paid 65 percent of the taxes.

How could that be? The answer is simple: People behave differently when tax rates are high as compared to when they are low. With low tax rates, they take their money out of tax shelters and put it to work in the economy, benefiting themselves, the economy and government, which collects more money in taxes because incomes rise.

High tax rates which very few people are actually paying, because of tax shelters, do not bring in as much revenue as lower tax rates that people are paying. It was much the same story after tax cuts during the Kennedy administration, the Reagan administration and the Bush Administration.

The New York Times reported in 2006: “An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year.”

Expectations are in the eyes of the beholder– and in the rhetoric of the demagogues. If class warfare is more important to some politicians than collecting more revenue when there is a deficit, then let the voters know that.

Please read the entire article at: Deficit Reduction

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