Monday, October 19, 2009
Confiscatory tax levels stifle the economy
From the RoundTable blog
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Bob Barnes
Barnes, of Blacksburg, is a financial adviser.
Re: "Return taxes to '60s levels," Sept. 11 commentary:
I know that Professor G. Rodney Thompson's comments on 1960s tax levels were satirical, but I fear that many who are not as familiar as he with the financial history of the period may not get the joke. Therefore some explanation is needed.
While it is true that in 1963 the highest federal income tax rate was 91 percent, the taxable income level to which it applied was over $400,000. Adjusted for inflation to 2009 dollars this would be an income of more than $2,768,000 per year. I wish one of my parents or grandparents had been in that bracket.
Thompson should also remind us that due to loopholes and tax avoidance measures legal at the time, very few people paid taxes at the top rates.
Many of these loopholes were closed in the 1986 revision of the tax code, which also lowered the top rate to 39 percent. After the code revision it was determined that tax revenue generated actually increased. This is for the simple reason that most individuals will pay taxes that are perceived as fair, but will go to great lengths to avoid taxes that are perceived as unfair or confiscatory.
The destructive nature of a 91 percent marginal tax rate, while intuitively obvious to Thompson, may need to be explained to his readers.
If a person knows that he will only be able to keep 9 cents of the next dollar that he earns, he is unlikely to expend the effort to earn it. In that case, the tax revenue generated on that dollar is zero.
A tax this high quells wealth creation and investment, which slows economic growth.
His other ironic assertion is that economic growth can be driven by government spending.
The government provides a regulatory environment where businesses can operate fairly and individuals can be assured of property rights. Growth comes from profitable private-sector companies investing in plant, equipment and employees, which was the case in the post-war years.
It is an error of correlation without causation to assert that high taxes caused growth. It should also be noted that the 91 percent top tax rate was a relic of the war years and began to be lowered after 1964.
Hopefully everyone can now better appreciate the facetious nature of Thompson's comments, and we look forward to more humorous articles from him in the future.
