Sunday, October 31, 2010

Income Tax Lies

this political season, i've heard the refrain over and over again:
  • cutting taxes will cost money
  • extending tax cuts will hurt the economy
  • reducing the income tax will reduce federal program funding
well, it's obvious that these pundits don't read history... and they've never understood the Laffer Curve (which was explained in Ferris Bueller's Day Off (1986) by none other than Ben Stein...

for those of us who don't know of the Laffer Curve (and refuse to look it up), let me explain... imagine a bell-shaped curve; low on one end, rising sharply up, the curve leveling off like a high-thrown baseball, dropping sharply back down, and ending as low as it begun... what this describes, is that the amount of money generated for the federal government by means of income taxes (height of the curve at any one point) is relative to the percent of income taxed (distance left-to-right on the curve)... for example, if you have an income tax of 0%, or no income tax, then the money generated is $0... that's obvious... but if income tax is 100% of earned income, the money generated will ALSO be $0... this is because there is no reason for anyone to earn income if it is taken away... therefore, income drops to zero, and 100% of nothing is still nothing.

the typical Laffer Curve is shown as symmetrical, but in practice it isn't... however, in practice, this concept is absolutely true... when there is no incentive to work for income, especially if your income is taken from you, then there is no reason to work... some may say that socialist or communist financial systems, where income is pooled and distributed, solves the issue of incentive... but it hardly gives one incentive if you work a 40-hour week for the same benefits your neighbor gets for doing nothing... why not do nothing, also?

well, at some point, the government out-taxes itself... but no one is going to ever come NEAR to 100% taxation, right?... that would be idiotic?... beware the idiots of Congress.

in 1916, the top income bracket paid 15% in income taxes... the lowest; 2% income taxes... by 1918, the lowest wage earners had a shock when they paid 12% income taxes... imagine the riots if we asked today's lowest earners to pony up an additional 10%!... but the highest earners of 1918 paid an astounding 77% income tax, a jump of 62%!... for the rich, there was no relief... from 1919 through 1921, they paid 73% of their income to the federal government.

well, if you apply the Laffer Curve to this, you already know what happened... those who earned less than $10,000 paid in total $155million in taxes... those who earned over $100,000 paid in total $194million in taxes... in 1921, there was the dreaded tax-cuts-for-the-rich (down to a whole 58%), after which the first group paid only $32million in taxes and the latter group paid $361million...

tax cuts yield more from the wealthy because they will invest that money into income-generating opportunities... that means, the wealthy will hire more people and produce more goods with the extra income, from which they will earn more income and pay more taxes...

tax cuts for the poor (and often for the "middle-class") yield nothing but less income tax... a 10% tax cut for a $50,000 worker (estimating $5,000 in taxes) gets $500 in savings... they may use this to pay down debt or take a long weekend vacation... it doesn't generate ANYTHING.

tax cuts of this sort do nothing for the economy... maybe a short-term bump in sales-tax, but over all, it's meaningless... so the next time you hear someone claim they want tax cuts for the poor and middle-class, you should know immediately that they are lying to you... they're lying or woefully ignorant.

and neither a liar nor an ignoramus should be running our government.

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