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America needs an income tax increase, not a decrease

Posted March 30, 2012, at 6:24 p.m.

Somehow, large numbers of people have been convinced that cutting taxes for the rich would be good for everybody, against all historical evidence.

The attack on the progressive income tax is justified by what politicians call “supply-side economics.” This theory says that if we lower taxes on capitalists, they will be more willing to invest money, “grow jobs” and so on. But things don’t work that way.

For instance, under President Dwight Eisenhower in the 1950s, the top bracket rate was a staggering 91 percent, and we had a period of strong growth. Growth increased after President Bill Clinton raised taxes in 1993, and declined after the Bush tax cuts of 2001 and 2003.

Incidentally, every income tax we have ever had has charged higher rates on the rich, starting with the tax Abraham Lincoln imposed to help pay for the Civil War.

Historically, high taxes on the rich have helped the economy. Actually, this makes sense. When thinking about building a new factory, the capitalist does not ask, “if I make money, what will be my marginal tax rate?” He asks whether the investment will win or lose. He knows that the more money he makes, the more he will have after taxes. If he does make money, he leaves the tax problem to his accountant.

Without capital, the capitalist cannot invest. But the rich already have plenty of capital; the 400 richest Americans, according to Forbes Magazine, have $1.37 trillion. The Fortune 500 corporations hold $2.1 trillion in cash. Where is the investment? Where are the jobs?

You’d think the supply siders would learn. But Rick Santorum proposes a tax with only two brackets: 10 percent and 28 percent. This would be a huge tax cut for the rich, those in the 35 percent bracket, and no tax cut at all for the poor, those in the 10 percent bracket. He also would cut corporate income taxes in half. These and other changes would increase the deficit by around $900 billion a year.

Mitt Romney’s plan at first sounds more fair: 20 percent off all tax brackets. Unfortunately, he also wants to cut the corporate income tax, eliminate the estate tax, cut taxes on investment income and on and on. It would cost around $180 billion per year, and 57 percent of its benefits would go to the top 1 percent, according to the Tax Policy Center.

It used to be that Republicans cared about the deficit while Democrats cared about growth. For instance, Eisenhower maintained the 91 percent tax rate to attack the deficit. But today’s politicians (mostly Republican) like to promise tax cut goodies in order to get elected. They talk vaguely about spending cuts, but cutting taxes is much easier than cutting spending, so tax-cutting nearly always results in larger deficits. Cutting the taxes of the rich also enlarges that swamp of stagnant money at the top which does nothing to promote jobs.

What sort of tax changes would make sense? Nearly the opposite of what Republican candidates suggest.

I propose an Eisenhower Plan, also with a top tax bracket of 91 percent. First, roll back the Bush tax cut for the rich, making the temporary new top bracket again 38.6 percent, then enact new brackets on top of that. At the top, for income over $1.69 million, restore Eisenhower’s 91 percent ($1.69 million corresponds to Eisenhower’s $200,000 top bracket).

If the additional revenue were applied directly to the deficit, these tax rates would modestly restrict the economy. Instead, we should apply about $1 trillion a year to rebuilding our infrastructure, to expanding higher education, and to other investments in our future. In that way, we will be redirecting stagnant cash from the rich to the needs of the future and to creating demand.

Paradoxically, by creating more demand, this plan also will help the entrepreneurs. By the end of two years, our economy will be humming again, tax receipts will increase and government spending on the poor will decline. Politicians will be arguing about what to do with the surplus.

Rufus Wanning lives in Orland.

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