You can say two things for certain about modern liberals -- they love spending government (read: your) money, and they hate the wealthy. Which makes the liberal loathing of low taxes especially baffling. For the truth of the matter is that lower tax rates often bring in more, not less, revenue for the federal government. And when they do, that revenue is overwhelmingly plucked from the pockets of the "millionaires and billionaires" whom liberals constantly decry.
That cutting taxes could mean more money for the government may at first seem counterintuitive. Here's how it works: Low tax rates leave businesses with more money to invest and expand, adding jobs and creating both more taxpayers and more money that can be taxed. In short, low tax rates act as incentives for the kind of behavior that generates tax revenue in the first place.
Take the capital gains tax. Capital gains are profits generated by the sale of capital assets like stocks or bonds. In 1997, the capital gains tax rate was cut from 28 to 20 percent. What happened? Writing for the Manhattan Institute, economist Stephen Moore notes that, "In the subsequent three years, the amount of taxable capital gains almost doubled" (The U.S. Tax System: Who Really Pays). In 2003 the capital-gains rate was lowered still further to 15 percent, resulting in a whopping 107 percent increase in revenues by 2005.
The same thing happened when income tax rates were slashed in the Reagan era. In 1981 the top rate was cut from 70 to 50 percent; in 1986 it was lowered again to 28 percent. This freed up oceans of capital in the private sector, powering a 25-year economic boom that, Moore notes, increased tax receipts over the long haul, from $517 billion in 1981 to more than $1 trillion in 1990.
And who was paying these new revenues that came pouring into the public coffers when rates were lowered? It was largely "the rich." In 1972, when the top income tax rate was 70 percent, the top 1 percent of American earners shouldered a mere 18 percent of the total income tax burden. Today, the top rate is 35 percent, but the rich pay 39 percent. In other words, the rich pay more than double the share of taxes today than they did 40 years ago, even though the tax rate is half what it was back then.
Policymakers should keep these facts in mind as we approach the January 2013 "fiscal cliff." That is when the 2003 tax rates (the so-called "Bush tax cuts") are set to expire. President Obama is practically salivating at the prospect of higher taxes -- he especially wants to raise taxes on those making $250,000 or more. His new health care law already contains more than a dozen tax increases and "revenue-related provisions" that will total $675 billion over 10 years.
But if Obama and his fellow liberals really want to raise more money to pay for their dearly-beloved social programs, and if they really want the rich to pay more, they need an economy that is growing quickly, rather than the current, stagnant economy or one busted under the weight of new tax increases.
Because if history is any guide, the rich will park their cash in tax shelters if taxes go up. From there, it will do no good for anyone -- Uncle Sam included.
Matt Patterson is senior fellow, Center for Economic Freedom, at the Competitive Enterprise Institute. Mpatterson.firstname.lastname@example.org.