The Effect of Fairness on Tax Revenues
By W.A. Beatty
October 12, 2012
Vice President Joe Biden, speaking in Iowa on October 4, 2012, said:
On top of the trillions of dollars of spending that we have already cut, we're gonna ask - yes - we're gonna ask the wealthy to pay more. My heart breaks, come on man. You know the phrase they always use? Obama and Biden want to raise taxes by a trillion dollars. Guess what? Yes we do in one regard. We want to let that trillion dollar tax cut expire so the middle class doesn't have to bear the burden of all that money going to the super wealthy. That's not a tax raise, that's called fairness where I come from.
So, now we have it officially: if Obama and Biden are re-elected, they are going to raise taxes by letting "that trillion dollar tax cut expire." The comment by Biden raises two questions. First, what is "fairness"? Second, how will a tax increase affect the economy?
Regarding "fairness," I can find no source where the term is specifically defined. There are plenty of sources where Obama, et al. refer to the term without defining it: here ("The president is confusing me. Every time he's on TV, he says that the rich should pay their fair share. ... Well, I don't know what fair share is. That's what's bothering me."), here ("I want an America where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules"), here ("All those things are designed to make sure that the American people, their genius, their grit, their determination, is -- is channeled and -- and they have an opportunity to succeed. And everybody's getting a fair shot. And everybody's getting a fair share."), here (Biden says the super-wealthy are not doing their fair share), and here ( "Democrats have been playing the 'fairness' card throughout the campaign[.]").
During a Democratic Party primary debate before the 2008 election, Obama said, "[W]hat I've said is that I would look at raising the capital gains tax for purposes of fairness."
The closest Obama has ever come to defining the term is, "All I'm saying is that those who have done well, including me, should pay their fair share in taxes." But notice that this "definition" is rather vague and imprecise, so as to have it mean what he wants it to mean. As Jim Yardley said, "'[f]air' is one of those warm, fuzzy words that allows the listener to define it to his own personal taste -- and the definition changes from one specific case to another."
So, there can be no doubt that Obama and Biden want to raise taxes in the name of what they perceive as "fair."
Regarding taxes, let's see what history has taught us. There have been, since the implementation of the income tax, four major tax rate reductions. Every one of them has been followed by increased tax revenues.
Daniel J. Mitchell, Ph.D. of The nonpartisan Heritage Foundation said:
There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase. ... Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to 'soak the rich,' the rest of us take a bath.
Does "soak the rich" sound eerily like "the rich don't pay their fair share"?
According to Mitchell, revenues rose in the 1920s after a tax cut, as well as after the Kennedy tax cut and the Reagan tax cut. In fact, John F. Kennedy, a Democrat icon, said, "[T]he soundest way to raise the revenues in the long run is to cut the rates now." Kennedy was speaking of taxes when he said that.
But, as Mitchell says, "{b}oth the level of government spending and where that money goes are very important." That, for all you Democrats/liberals/progressives out there, means that increased revenues must be accompanied with reduced spending. Democrats love to say that tax reductions cause deficits. That is simply a lie. "The deficit is mostly a result of spending, which is responsible for eighty to ninety percent of the deficit."
Mitchell said that in 2003. And guess what: economics has not changed since then. A 2006 article by Edmund J. Andrews quotes President George W. Bush as saying, "The tax relief we delivered has helped unleash the entrepreneurial spirit of America and kept our economy the envy of the world." Bush made that remark after "tax revenues rose twice as fast as his administration predicted" and vindicated tax cuts that "spur the economy and ultimately increase revenues[.]"
A 2011 article by Alejandro Reuss revisited the "Laffer Curve" and its revenue ramifications. The Laffer Curve is attributed to supply-side economist Arthur Laffer; it explains how tax rates affect individuals. The article is a long read but well worth the time, because it offers a good explanation of human nature and why lowering tax rates increases revenue.
My question is, and has been since Obama took office, "When will Obama, Biden, and Democrats specifically define what 'fairness' is?" It seems that "fairness" is a moving target -- i.e., whatever they want it to be at the time they are speaking, a way to appeal to the audience to whom they are pandering. Can anyone provide any source where Obama, Biden, and Democrats define "fairness" so we will know whether or not we're being fair?
I have another question. How can Obama, Biden, and Democrats/liberals/progressives ignore history -- in other words, what has actually happened in the past -- when tax cuts and tax increases have been enacted? Or do they believe that by raising taxes and tax rates, they can somehow change history and human nature?
Do they really have that level of hubris? Or are they just "knee-jerk" Democrats who will let their ideology overrule what is plain for any student of history to observe?
Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University. He was a professor of quantitative management specializing in using statistics to assist/support decision-making. He has been a consultant to many small businesses and is now retired. Dr. Beatty is a veteran who served in the U.S. Army for 22 years. He blogs at rwno.limewebs.com.
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