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Higher Tax Rates Won’t Boost Revenue

President Barack Obama and his Democratic Party would have liked to increase taxes as part of a “balanced” approach to deficit reduction. Republicans, adamantly opposed to raising taxes, especially during a time of fragile economic recovery, managed to prevent immediate tax hikes although revenue enhancement could be part of a broader plan that is supposed to be worked out by a bipartisan congressional committee later this year.

Will increasing tax rates—by repealing the Bush era cuts for incomes over $250,000 for instance—boost revenue? Probably not.

America has tried high tax rates before. Between 1951 and 1963, the highest income tax rate was 92 percent. The top capital gains tax rate approached 40 percent in the late 1970s. Yet the ratio of individual income tax receipts to gross domestic product has always remained about 8 percent, whatever the rates.

Total tax revenue has also remained constant for the better part of the twentieth century at about 18 percent of GDP.

Democrats like to point at President Bill Clinton’s second term in office when income tax revenues reached an unprecedented 9.6 percent of GDP but this coincided with a period of rapid economic expansion and a reduction in the capital gains tax from 28 to 20 percent which encouraged a much greater realization of taxable gains through stock sales.

Simply raising the top income tax rate is unlikely to bring in much more revenue. President Obama’s “corporate jet owners” are far more likely to park their cash in some offshore bank account or fiddle the books to prevent having to pay higher taxes. That may not be particularly ethical of them but “the rich” are paying more than their fair share as it is. The top 0.1 percent of income earners in the United States pay as much as 18 percent of all federal income taxes. The top 1 percent pays 38 percent while 59 percent of total income tax revenue is provided by the top 5 percent of taxpayers. The Federal Government isn’t exactly letting them “relax and count their money” even if the president thinks otherwise.

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