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Taxes

Dems' 70% Tax Proposal Is Classist

The income tax began in 1913 rooted in class envy and it's only gotten worse.

Louis DeBroux · Jan. 23, 2019

Freshman Democrat Congresswoman Alexandria Ocasio-Cortez, the renowned economist and climatologist whose intellectual luminescence was previously hidden while she worked as a bartender, has added prophetess to her repertoire, warning us this week that “the world is going to end in 12 years if we don’t address climate change.” Just in case that wasn’t dire enough, she called “climate change” her generation’s “World War II.”

But fear not, ye masses trembling in apocalyptic fear, for Ms. Ocasio-Cortez has the solution — a “Green New Deal” eliminating fossil fuels by 2030 while lowering inequality! And while “progressives” laud the Green New Deal, they are less comfortable attaching a price tag, and no wonder. Though Cortez is short on details, a similar plan offered by Green Party chairman Jill Stein would cost an astronomical $700 billion to $1 trillion per year.

So how to pay for it? According to Cortez, through more debt spending and raising the marginal income tax rate on high earners ($10 million/year and above) to 70%. Unfortunately, higher tax rates have historically resulted in only modest revenue gains while creating a drag on the economy.

Why? As the Tax Foundation’s Kyle Pomerleau and Huaqun Li explain, promises of increased revenue from higher tax rates “do not account for behavioral effects.” For example, “A tax rate that high could encourage individuals to shelter their income, thus reducing potential revenue from this proposal.”

In other words, those earning enough to be taxed at the 70% level have myriad ways to shelter their money from such immorally confiscatory tax rates, so the net result is that rather than investing that money and creating new jobs, the money is sheltered. Counterintuitively, historical tax records show the lower the marginal tax rate, the greater percentage of total taxes are paid by the wealthy.

Because high earners react to higher tax rates by shifting income to lower-tax uses, the Tax Foundation estimates Ocasio-Cortez’s plan would only generate an additional $189 billion over 10 years. Some pro-tax-increase economists argue up to $700 billion could be raised over a decade, but they ignore the behavioral changes resulting from higher taxes. And if, as some Democrats propose, capital gains were treated as normal income and taxed at the 70% rate, government would actually lose an estimated $63.5 billion. Either way, the tax increase would not come close to funding the Left’s green-energy pipe dream unless Democrats follow historical precedent and tax the rich on the way to also hitting the middle class.

Ocasio-Cortez and her socialist Myrmidons should also take a lesson from history and reject public policy driven by jealousy and envy. While “the rich” make an easy target, we should remember that the income tax itself, which now impacts most Americans and makes the IRS feared and hated, only passed because Congress claimed it would punish only the so-called rich.

After passage of the 16th Amendment, President Woodrow Wilson called a special session of Congress to pass the income tax. It started off as a 1% tax on incomes above $3,000 (roughly $76,000 in 2018 dollars) with surcharges of between 2% and 7% on incomes between $20,000 and $500,000 (between $500,000 and $12.7 million in 2018 dollars).

But the tax rates soon increased, and the threshold at which the tax kicked in decreased, until everyday Americans working hard and sacrificing to make ends meet discovered the tax man now considered them “rich” and wanted their tax money.

In 1914, the income tax generated just $28 million from a tiny handful of wealthy Americans. Two years later the rate was raised to 15%, generating $68 million from a few more workers. In 2017, nearly every working American had become subject to the income tax, and the top marginal rate had skyrocketed to 39.6%, generating a staggering $1.688 trillion.

And as bad as the income tax is for economic growth and individual prosperity, it has done far more damage to individual liberties. In 1913, Speaker of the Virginia House of Delegates Richard E. Byrd warned, “A hand from Washington will be stretched out and placed upon every man’s business. … Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the taxpayer. An army of Federal officials, spies and detectives will descend upon the state.”

But alas, driven by greed and envy, Americans chose to punish their neighbors, foolishly thinking punishment would never come for them. Too many Americans are perfectly happy to raise taxes on others as long as it doesn’t impact them.

In 1965, former IRS Commissioner T. Coleman Andrews warned of the need to abolish the income tax, declaring, “Congress went beyond merely enacting an income tax law and repealed Article IV of the Bill of Rights, by empowering the tax collector to do the very things from which that article says we were to be secure. It opened up our homes, our papers and our effects to the prying eyes of government agents and set the stage for searches of our books and vaults and for inquiries into our private affairs whenever the tax men might decide. … The income tax is bad because it was conceived in class hatred [and] is an instrument of vengeance.”

With “progressives,” government is never big enough and taxes are never high enough. But maybe President Donald Trump should call out their hypocrisy by agreeing to the tax increase so long as every penny is used to pay down the national debt. It would be a poison pill for Democrats.

Better yet, we should repeal the income tax altogether and restore individual liberty.

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