In a recent Newsweek editorial, Fareed Zakaria betrays the degree to which he has bought in to the class-warfare that U.S. tax policy has become, both through his blatantly untrue statements and his sympathetic tone to sucking as much revenue as possible out of those who contribute the most to the economy.
First, he claims that “the Bush tax cuts remain the single largest cause of America’s structural deficit—that is, the deficit not caused by the collapse in tax revenues when the economy goes into recession,” which belies all the economic data. As Brian Reidl of the Heritage Foundation asserted in theWall Street Journal,
Sen. John Kerry (D., Mass.)…has long blamed the tax cuts for having "taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see." That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.
The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing?…CBO's 28 subsequent budget baseline updates since January 2001… reveal that the much-maligned Bush tax cuts, at $1.7 trillion, caused just 14% of the swing from projected surpluses to actual deficits (and that is according to a "static" analysis, excluding any revenues recovered from faster economic growth induced by the cuts).
The bulk of the swing resulted from economic and technical revisions (33%), other new spending (32%), net interest on the debt (12%), the 2009 stimulus (6%) and other tax cuts (3%). Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4% of the swing. If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.
Yet having left the realm of reality, Zakaria then goes on to make sweeping generalizations about what should be done in this economic fantasyland.
He goes on to say that “the impact of marginal shifts in tax rates on growth is pretty unclear,” citing that “Clinton raised taxes in 1992 and ushered in a period of extraordinarily robust growth. Bush cut taxes massively in 2001 and got meager growth in return. Three tax cuts enacted since the financial crisis have done little to spur growth.” From this dubious information, he calls for Congress “to do what it does so well—nothing” and allow the largest tax hike in history across the board.
But, he suffers from crucially flawed information. As Arthur Laffer the renowned economist articulates,
Anyone who is familiar with the historical data available from the IRS knows full well that raising income tax rates on the top 1% of income earners will most likely reduce the direct tax receipts from the now higher taxed income—even without considering the secondary tax revenue effects, all of which will be negative.
When President Kennedy cut the highest income tax rate to 70% from 91%, revenues also rose. Income tax receipts from the top 1% of income earners rose to 1.9% of GDP in 1968 from 1.3% in 1960. Even when Presidents Harding and Coolidge cut tax rates in the 1920s, tax receipts from the rich rose. Between 1921 and 1928 the highest marginal personal income tax rate was lowered to 25% from 73% and tax receipts from the top 1% of income earners went to 1.1% of GDP from 0.6% of GDP.
Or perhaps you'd like to see how the rich paid less in taxes under the bipartisan tax rate increases of Presidents Johnson, Nixon, Ford and Carter? Between 1968 and 1981 the top 1% of income earners reduced their total income tax payments to 1.5% of GDP from 1.9% of GDP.
In speaking about only the tax rate on the top end, Laffer gets at the cripplingly progressive nature of the U.S. tax system, which results in almost half of all Americans facing no tax liability whatsoever while those in the economy who create jobs and spur investment shoulder the burden. As Zakaria admits, “The top 3 percent of Americans,” which includes the majority of small businesses, “contribute almost 50 percent of federal income taxes,” and they will face a massive tax hike at the end of this year.
In his advocacy for higher taxes, Zakaria essentially argues that the best way to help an alcoholic is to guarantee him a steady supply of alcohol to keep things on an even keel, given that the U.S. debt crisis results entirely from overspending. As Reidl states,
The fact is that rapidly increasing spending will cause 100% of rising long-term deficits. Over the past 50 years, tax revenues have deviated little from their 18% of gross domestic product (GDP) average. Despite a temporary recession-induced dip, CBO projects that even if all Bush tax cuts are extended and the AMT is patched, tax revenues will rebound to 18.2% of GDP by 2020—slightly above the historical average. They will continue growing afterwards.
Spending—which has averaged 20.3% of GDP over the past 50 years—won't remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above, CBO figures show spending surging to a peacetime record 26.5% of GDP by 2020 and also rising steeply thereafter.
Putting this together, the budget deficit, historically 2.3% of GDP, is projected to leap to 8.3% of GDP by 2020 under current policies. This will result from Washington taxing at 0.2% of GDP above the historical average but spending 6.2% above its historical average.
The facts remain clear—one cannot call for both growth and higher taxes; they are mutually exclusive. If Zakaria wishes so fervently to pay more money to the government, he is welcome to donate to the Treasury here. Those who do advocate “soaking the rich” have no interest in expanding the pie, but in taking one person’s piece and handing it to someone else. The U.S. has not changed in the slightest since Reagan asserted on October 27, 1964 that “we have so many people who can't see a fat man standing beside a thin one without coming to the conclusion the fat man got that way by taking advantage of the thin one.”