It is always nice to know that your thoughts have validity, and my recent comments about Presidents Ronald Reagan and John F. Kennedy have been validated by none other than Arthur Laffer in an article in the Wall Street Journal. In his article Mr. Laffer focuses primarily on President Kennedy and compares the President’s efforts to spur the economy in the 1960s to recent and historical efforts to “soak the rich.” Mr. Laffer and I both believe that raising taxes on the wealthiest 1% of the taxpayers will result in a decrease in revenues, and this is borne out by data from the IRS itself. Sadly, we are now facing not only the very real possibility that income taxes will be increased on top earners, but the fact that everyone will soon be hit with more taxes of all types. But more on that in a later post.
In the WSJ article Mr. Laffer points out that during the period 1978-2007, a time of what he calls “ubiquitous tax cuts,” the actual revenue from the top 1% of earners actually rose from 1% to 3.3% of GDP while that of the bottom 95% dropped from 5.4% to 3.2% of GDP. In other words, lowering taxes actually raised income tax receipts from the richest Americans. While this would seem counter-intuitive, it is actually very reasonable. As Mr. Laffer explains, the wealthy are much better able to avoid paying taxes through shelters, timing, composition, and other perfectly legal methods - some of which are still being used today. (Mr. Laffer uses Massachusetts Senator John Kerry’s recent yacht purchase in tax-favorable Rhode Island rather than is own tax-heavy home state as an example.) The less wealthy, on the other hand, are unable to afford the tax experts and accountants who would be able to advise them how to protect their income - as well as having fewer options of how they make their money in the first place.
To illustrate the opposing effect of tax increases Mr. Laffer compares how the top 1% decreased their tax bite from 1.9% of GDP to 1.5% of GDP during the tax increases of 1968-1981. He then presents data from the Great Depression, a period only slightly worse than our current one. From 1930 to 1940 Presidents Herbert Hoover and Franklin D. Roosevelt raised the top personal income tax rates from 24% to a whopping 83% - more than triple. And what was the result of these “soak the rich” moves? Tax receipts from the top 1% stayed flat (1% of GDP in 1940 compared to 1.1% of GDP in 1928) and the overall GDP dropped, sending the country into a double-dip depression.
What is the lesson from this? One we should all hope that some members of the government will learn - raising taxes does not raise revenue. Rather it tends to decrease revenue as those who would pay the most find ways to protect their money. In addition it inhibits investment into the economy, which will only prolong the current financial morass. As Mr. Laffer points out, “Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that well-trained economists should know to avoid.”
Next time I will talk about the other tax increases the rest of us are facing.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722
In the WSJ article Mr. Laffer points out that during the period 1978-2007, a time of what he calls “ubiquitous tax cuts,” the actual revenue from the top 1% of earners actually rose from 1% to 3.3% of GDP while that of the bottom 95% dropped from 5.4% to 3.2% of GDP. In other words, lowering taxes actually raised income tax receipts from the richest Americans. While this would seem counter-intuitive, it is actually very reasonable. As Mr. Laffer explains, the wealthy are much better able to avoid paying taxes through shelters, timing, composition, and other perfectly legal methods - some of which are still being used today. (Mr. Laffer uses Massachusetts Senator John Kerry’s recent yacht purchase in tax-favorable Rhode Island rather than is own tax-heavy home state as an example.) The less wealthy, on the other hand, are unable to afford the tax experts and accountants who would be able to advise them how to protect their income - as well as having fewer options of how they make their money in the first place.
To illustrate the opposing effect of tax increases Mr. Laffer compares how the top 1% decreased their tax bite from 1.9% of GDP to 1.5% of GDP during the tax increases of 1968-1981. He then presents data from the Great Depression, a period only slightly worse than our current one. From 1930 to 1940 Presidents Herbert Hoover and Franklin D. Roosevelt raised the top personal income tax rates from 24% to a whopping 83% - more than triple. And what was the result of these “soak the rich” moves? Tax receipts from the top 1% stayed flat (1% of GDP in 1940 compared to 1.1% of GDP in 1928) and the overall GDP dropped, sending the country into a double-dip depression.
What is the lesson from this? One we should all hope that some members of the government will learn - raising taxes does not raise revenue. Rather it tends to decrease revenue as those who would pay the most find ways to protect their money. In addition it inhibits investment into the economy, which will only prolong the current financial morass. As Mr. Laffer points out, “Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that well-trained economists should know to avoid.”
Next time I will talk about the other tax increases the rest of us are facing.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722
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