Sorry, WSJ, But "Confiscatory" Tax Rates Are The Welfare Reform We REALLY Need

To borrow from the rhetoric of the Great Dissembler himself:  there they go again.

Here is yet another attempt to promote the interests of the comfortable at the expense (and I do mean expense) of the afflicted, this time in an attempt to take out the alleged liberal "lie" that the "confiscatory" federal tax rates of the 1950s promoted the rapid growth of the American economy during that same period.  The "substance" of this attempt rests on two pillars:  an alleged drop in the proportionate share of federal taxes paid by most Americans, and the elimination of personal forms of tax shelters as a consequence of the 1986 Tax Reform Act.

Well, I'm happy to take on the role of Samson, and knock down both of those pillars, albeit in the hope that, unlike Sampson, I don't die with the Philistines who promote such economic drivel.  Let's start with Pillar Number One:  the share of tax revenues paid by the middle class.

According to Mr. Schiff (who, in a subsequent footnote to the article, may have been guilty of some very fuzzy math), the share of taxes borne by the lower two-thirds of American income earners fell from from 29% in 1958 to 6.7% in 2010.  If those numbers sound a little "fuzzy" to you, there may be a very simple reason for that:  they're simply not true in the first place.  Lest you think of that last sentence as a piece of brazen partisan mischief on my part consider this contrarian statistical information from a highly conservative source.   That's right:  a conservative Web news outlet posts a report that, despite major income tax cuts by a Republican Congress and an Republican President, the lion's share of federal taxes were being paid by you and me.  Of course, you suspected this all along, but it's nice to have the other side do the dirty work of coughing this unpleasant fact up.

Then there's Pillar Number Two:  the elimination of all those nasty tax shelters by the 1986 Act, still hailed mysteriously as an example of the wonderful bipartisan way in which Washington should work.  After all, it knocked out a few deductions that benefited the middle class and the economy, such as interest on credit card debt.  But let that pass.

Because whatever the 1986 Act did with regard to tax shelters, it lowered tax rates on corporations and high earners, while raising them on low earners.  And, although it did close a number of business loopholes, subsequent revisions to the Act supplied a whole host of new ones.  Far from being an example of how the two major parties can and should work together, the 1986 Act is just another example of how Democrats in Washington can and do allow themselves to be snookered by their Republican counterparts.  Any "fairness" achieved by the passage of the Act was far from bulletproof, as long as Republicans continue to push for more business tax breaks that will "pay for themselves."  (Sort of like the war in Iraq.)

Which observation lets me circle round to the reason why supposedly "confiscatory" tax rates actually raise more revenue, in spite of the never-ending search for tax shelters.  Like Samuel Johnson's prospect of a hanging, high tax rates concentrate the investor's minds wonderfully.  It literally forces them to find ways to put their money to work in ways that will ensure that they can live in the say to which they are, or would like to become, accustomed. 

Tax shelters, on the other hand, simply take money out of  the marketplace, forcing investors to scream for yet more tax cuts in order to raise investment capital.  That's how the Mitt Romneys of the world operate:  they keep their money safe in the Cayman Islands, while forcing the rest of us--or, as they like to see us, the "suckers"--to finance their latest pet projects.  That's why tax cuts for the rich are simply a foreign aid program, as well as an excuse to cut domestic programs that level the economic field for everyone.

Think about all of the new technologies that emerged in the late 1950s and early 1960s, and the companies that provided them, like Xerox.  All of that happened because investors had to work hard to find opportunity.  As I have said many times, and as I'll say as many times as I need to, tax hikes on the 1% is the next level of welfare reform that we need.  Instead of forcing us to endlessly recarve an existing pie, it will all us to bake more pie, and to have the means to feed everyone.

So demand them.  Loudly.  Early.  And often.  It's the only way we'll get out of the fiscal mess that the Great Dissembler's fantasies got us into.