More from Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth. For a bit about Roy’s experience see The Great Debate Part I
Let’s take socialism to an extreme. Let’s make sure everyone earns the same amount… that would be fair, right? So, for everyone that makes above average, we will take the difference and give it to everyone that makes below the average. That way, everyone makes the same. What would happen? Easy. I would quit working because I know that I don’t need to work to make the average wage. In short order, the average would drop to zero as soon as the last guy figured out he was the only one working. Extreme, yes, but incentives work in the trivial as well as the extreme.
Even if it is “Just another tired old solution that looks good on paper”, no system yet devised by man has improved the lot of ordinary people more than the productive activities unleashed by a free enterprise system.
So, what assurances do you have that “the top 3% will be divinely led to use theirs for R&D, business improvement, hiring new workers and all those other wonderful things Adam Smith promised we would experience in capitalist economies?” If history is any judge, the answer is pretty clear on this as well. Since 1978, the U.S. has cut the highest marginal earned income tax rate from 50% to 35%, the highest capital gains tax rate from about 50% to 15% and the highest dividend tax rate from 70% to 15%. During this time, income tax receipts from the top 1% of income earners rose from 1.5% of GDP to 3.3% of GDP… an increase of 120%. A fluke? Nope. When Kennedy cut the highest income tax rate from 91% to 70%, income tax receipts from the top 1% of income earners rose from 1.3% of GDP to 1.9% of GDP… an increase of 46%. What happened between Kennedy and Reagan, you say? The answer is the four stooges, Johnson Nixon, Ford, Carter and their redistributionist, Keynesian policies during which time U.S. equity prices decreased 20% in real terms and tax receipts from the top 1% of income earners went from 1.9% of GDP to 1.5% despite a rise in the top tax rates. Just another fluke? Nope. When Harding and Coolidge cut tax rates in the 1920′ from 73% to 25%, tax receipts from the top 1% of income earners went from 0.6% of GDP to 1.1% of GDP… an 83% increase. A prescient example is Roosevelt’s “Soak the Rich” tax increase in 1936, raising the top income tax rate from 63% to 79% along with a host of corporate tax increases arguably sending the slowly recovering economy into a double dip depression, with unemployment rates rising again to 20% in 1938. What happened to the tax receipts from the top 1% after the tax increase you ask? You got it, they decreased as a percentage of GDP, even as GDP fell. These examples are not cherry picked. Throughout history when tax rates on the top earners were substantially raised, production (economic activity) fell. So did tax receipts from the rich… a certainty in percentage of GDP terms and more often than not in gross terms. “The fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues while the taxpaying base was exterminated” – Bartlett.