Sen. Paul Simon has finally got around to saying how he plans to finance his plans for a grander welfare state. Of course, the first thing he would do as president is eliminate unemployment, and right there you have approximately $50 billion of extra revenue. Money saved by not having to look after the unemployed, plus taxes they now pay having found employment; wish I had thought of that.
But then the senator got around to taxes, and he begins gingerly. Instead of the top rate of 28 percent, he would raise that to 29 percent. Any individual earning $100,000 or more would now pay 29 percent federal tax. On three different occasions, Sen. Simon did not specify what kind of dough such an increase in taxation would raise. Concerning all of which, a few observations:
1) You don't really know how much more money a new tax will raise for at least two years. It takes that long for tax return data to be processed.
2) If we estimate by adopting a static model -- i.e., if we assume that absolutely no changes in economic behavior would result from lifting the tax rate from 28 percent to 29 percent on incomes of $100,000 or more -- we figure an increase in revenues of $2 billion, approximately.
Two billion dollars doesn't put much of a dent in a $150 billion deficit. The temptation, of course, would be to increase that 29 percent by another point . . . and another point . . . and another point. That requires us to speculate on the effects of such increases.
Between 1921 and 1926, the top marginal tax rate was cut from 63 percent to 25 percent, and the bottom rate was cut from 9 percent to 4 percent. This obviously resulted in a great reduction in the taxes paid by the highest income earners, correct? Incorrect. Those who made more than $100,000 were, in 1926, paying 86 percent more income tax than in 1921 under the higher rates.
In 1964, we cut the top rate from 91 percent to 70 percent and other rates proportionately. It amounted, roughly, to a 20 percent reduction in each income bracket. The result? The top 5 percent of taxpayers in the United States paid 7.7 percent more income taxes after their rates were reduced. The bottom 50 percent of taxpayers paid 9.2 percent less taxes in 1965 than they did in 1963.
Beginning in 1977, there has been a reduction in the top marginal tax rate to the current level. That reduction was from 70 percent to 28 percent. From which one imagines that the wealthier are paying less taxes? But a study released in October 1987 reveals that the share of income taxes paid by the wealthiest 5 percent of American families will rise to 40.9 percent in 1988 -- up from 36.9 percent in 1977. That is a startling difference, a difference that sweeps away (or should do so) the demagogic din of the past six years about how the rich are benefiting from Reaganomics at the expense of the poor.
And in money terms it comes to this: if the wealthy had continued to pay the same percentage of taxes in 1988 as in 1977, tax revenue would have diminished by $16 billion.
After Reaganomics sets in, the wealthiest 1 percent of Americans will be paying 23.8 percent of all income taxes. That is up from 19.5 percent in 1977. The poorest 50 percent of families (incomes below $26,360) will pay 5.9 percent of the total tax. Before Reagan, they paid 6.4 percent.
3) The lesson is clear -- namely, that higher marginal tax rates tend to reduce rather than to increase revenue. And, of course, in doing so affect the economy adversely. Gov. Michael Dukakis, who is so proud of the economic performance of Massachusetts, fails to note that his state has prospered from tax cuts enacted by his predecessor, and from a property-tax-limitation referendum (Proposition 2 1/2) -- both of which Dukakis opposed. And he fails to mention that his state has lost 78,000 manufacturing jobs over the past three years, jobs that have migrated to fiscally responsible states, here defined as states that spend less than a drunken sailor.
Between 1983 and 1987, federal spending rose (in real terms) by 10 percent. Average state spending went up 19.6 percent. Spending by the Commonwealth of Massachusetts under Dukakis went up 30.8 percent. Dukakis inherited a balanced budget in 1983. He faces a $500 million deficit in 1989.
Paul Simon and Michael Dukakis should run for president and vice president of Mexico, where their policies would be greeted as prodigal sons.