The Wall Street Journal-20080129-It-s Big- Get Taxes Right- but What-s Right-

Return to: The_Wall_Street_Journal-20080129

It's Big: Get Taxes Right, but What's Right?

Full Text (819  words)

Arthur Laffer's Jan. 25 op-ed, "The Tax Threat to Prosperity," is about the 200th crystal clear demonstration that cutting taxes on top income earners results in two things: an immediate economic shift into overdrive and increased tax revenue. The concept is so simple that our government-educated grade schoolers can understand it, but not a single politician can articulate it.

For example, prior to 2003 the capital gains tax was 20%. After lowering the tax to 15%, Microsoft unloaded $35 billion in cash to its shareholders. Okay class, which is greater: 15% of $35 billion, or 20% of nothing?

Furthermore, in a competitive world corporations are fleeing the U.S. in search of more hospitable tax environments. Democrats vilify them as "Benedict Arnolds" and being anti-American. They would like to handcuff these producers to the IRS to extract a pound of flesh for every dollar of profit. Republicans recoil in speechless stupor.

The "soak the rich" mantra is pure political grandstanding. While our heroes and heroines in the Beltway are bashing the rich and corporations, their personal tax lawyers and accountants are back home simultaneously shielding their own income and wealth from the grim reaper. To say these plutocratic phonies are dishonest would be a compliment.

Jeffrey Ihnen

La Crosse, Wis.

---

I must confess Mr. Laffer's fine article invoked in me a sense of frustration. Having been educated in economics as a youth, I fully appreciate and trumpet this learned gentleman's points. Those of us in the upper reaches of income are constantly motivated to alter our sources of income based on the net yield these actions will actuate. Truly, altering the marginal rates for the heavy lifters of tax revenues moves the sources of investment.

But the real problem here, and our president is exacerbating its dangerous advent, is that the pool of voters interested in tax reform continues to dwindle. In my opinion this is, or should be if they are really not that clever, the strategic goal of all liberal politicians. Once the majority status of would-be taxpayers has been eliminated from the playing field, at no time in the future will true tax reform occur unless those uninterested parties are swayed to vote for such change. Yet, why would anyone who then would enjoy the security and prosperity of our country gratis want to amend such a gravy train? Maybe I need to begin looking for a new home in Tuscany where at least socialism is accompanied by a romantic backdrop.

Mike Benoit

Sandy Springs, Ga.

---

Mr. Laffer does his usual great job explaining what happens to tax revenues when marginal rates change. What he didn't say (maybe because he ran out of space) was the impact on our standard of living when politicians increase tax rates. On that score, the Democrats' desire to raise marginal tax rates (their rollback of the "tax cuts for the rich") will severely impact future generations.

All investors make their decisions based upon risk vs. benefit. If the benefit goes up, an investor is willing to take more risk. The converse is also true -- if the benefit goes down, investors will take less risk. What does this have to do with our standard of living? Most of the creative effort that has advanced our standard of living comes from private investment in search of profit. That, Bill Gates, is what capitalism is all about. It is no accident that the technological advances since the Reagan marginal rate cuts of the '80s have been nothing less than stunning. As the after-tax return for investors has increased due to lower marginal tax rates, so has their investment in more risky but more rewarding research and development.

It therefore stands to reason that higher tax rates will not only depress tax revenues, as Mr. Laffer correctly asserts, but they will also make some investors rethink their ability to take risks with their money. We want investors to take a risk on the next cellphone or arterial stent; when they don't, we all suffer. That's why this debate is so important -- it's not only about money; it's about our future standard of living as well.

John Cox

Chicago

---

Arthur Laffer points out that the top 1% of income earners paid 17.58% of all federal income taxes in 1981 and 39.58% of all income taxes in 2005 as marginal tax rates dropped. As he notes, 1981 coincides with the start of the Reagan administration. The percentage increase makes for an impressive statistic to buttress the supply-side argument. However, Mr. Laffer does not mention that the top 1% of income earners during the same time period more than doubled their share of total national income from about 10% to over 20% -- percentages corroborated by IRS data. His selective use of statistics is just another form of Reagan hagiography that seems to be in full bloom this season.

James Glickson

New York