$840.00 cup of coffee?

My Top Ten reasons to vote for McCain/Palin:
Reason #1 Income Taxes (aka $840.00 cup of coffee)
By Jay Branson, CFP, ChFC

There are many reasons why John McCain will be better for our country as President than Barack Obama. I will be sharing 10 of my reasons starting with Income Taxes. Next, will be a simple explanation on what (and who) caused our current economic problems. This is a lengthy document because it is a complex issue. I have tried to simplify it where possible without making it too elementary. The stakes are high in this election. If a Democrat is elected President with a majority in the House and Senate it could take decades to undo the liberal, socialist, policies they would inflict on our country.

Let’s start with their current stated positions. John McCain proposes to extend the Bush tax cuts and make them permanent, basically keep rates where they are today. He also proposes cutting the corporate tax rate from 35% to 25% (we have the 2nd highest corporate tax rate in the world). Barack Obama says he wants to give a tax cut to 95% of tax filers. He has also said he would increase the capital gains tax to 30%, and that he wants to increase the payroll tax (FICA withholding) by 2-4%. McCain’s policies will stimulate the economy, and increase the net revenue to the government. Obama’s policies are misrepresented, unfair, and will harm (not help) our struggling economy.

First, as is illustrated in the table from the IRS below 50% of tax filers pay effectively all (97%) of the Personal Federal Income Tax. His proposal calls for tax “cuts” in the form of checks paid to 95% of tax filers including those who have paid no income tax. These checks are not actually tax cuts, they are welfare checks. This mischaracterizes the truth and substitutes nuance for clarity. If he honestly said that I want to “spread the wealth” to 45% of tax filers who don’t pay tax by sending them a check ($500/$1000) instead of calling it a tax cut he would lose support.

Second, the top 5% of tax filers who he admits wanting to raise taxes on already pay 60% of all Personal Federal Income Taxes. How much is fair and how much is enough? How about this as an example? Barack Obama invites 100 people to a new monthly dinner club, including you. He says it’s not “Dutch Treat” its “Obama Treat” which you have never heard of. You and 4 others have to work so you arrive late after drinks, appetizers, the main course, and desert has been served. You order a cup of coffee. The waiter brings the bill ($2,000) to the table and 50 people excuse themselves to go to the bathroom and never return to the table. 25 people pass the bill around their end of the table and agree that the food wasn’t that good and they should only pay $11.00 each (instead of $20.00 per person) which they slip into the bill and then quietly leave the table. The next 15 people read the bill determine it is $20.00 per person and leave the cash in the bill and thank everyone and say good night and leave. Of the next 10, 9 see the bill realize that the payment is short (one is on the phone) and decide that they will each pay $65.00 and while the last guest is still on the phone they wave good-by and leave. The last guest finally finishes his business phone call (his name is Joe and he is a plumber and has 20 employees) and the waiter arrives picks up the bill with the cash paid and asks the remaining guest if he wants to pay the balance in cash or by credit card. He hands the waiter a credit card and the waiter returns with a charge slip for $840.00. “But I only had a cup of coffee”, sorry says the waiter, that’s the amount due, “Obama Treat”. The man reluctantly signs the charge slip and hands it to the waiter. The waiter says “see you next month”. Sound fair to you? How much is fair? How much is enough?

Third, It has been proven in the 1920’s, 1960’s, 1980’s, and in 2000 that tax cuts stimulate the economy and actually increase net revenue to the government. Conversely tax increases reduce net revenue to the government and cause the economy to slow. Two articles below “Inconvenient Tax Truths” and “The Reagan Tax Cuts: Lessons for Tax Reform” demonstrate this point in detail. Letting the Bush tax cuts expire and increasing taxes on the upper income tax filers will reduce tax revenue and hurt the economy. This idea my seem counter-intuitive, but consider Wal-Mart as an example. They sell at the cheapest prices around and have grown to be the largest retailer in the world. If they were to dramatically increase their prices, what do you think would happen?

From the WSJ Opinion ArchivesOUTSIDE THE BOX

Inconvenient Tax Truths

Charlie Rangel and other liberal leaders want to raise tax rates even if it means lower tax revenues.
by PETE DU PONT Tuesday, October 30, 2007 12:01 A.M. EDT

Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.

Finally, another inconvenient truth is that there have been 49 consecutive months of job growth as a result of the economic expansion induced by President Bush's 2003 tax rate reductions.
One would think that this positive economic performance would inspire Congress to continue the successful policies that caused it. But the liberal establishment takes a negative view of tax rate reductions and embraces the opposite approach: ensure expiration of the Bush tax cuts in 2011 and in the meantime enact substantial tax increases.

Rep. Charles Rangel of New York, chairman of the tax-writing House Ways and Means Committee, last week introduced an estimated $3.5 trillion tax increase that would raise the capital gains tax rate from to 19.6% from 15% and places a surtax of as much as 4.6% on people making more than $150,000 a year. Mr. Rangel applies it not to current taxable income but to adjusted gross income, thus phasing down itemized deductions such as charitable contributions, home mortgage deductions, and state and local tax deductions. Together with the end of the Bush tax cuts, Mr. Rangel's plan would increase the top income tax rate to 44% from 35% for individuals, small-business owners and farmers, who make up about three-fourths of taxpayers in the highest bracket.

While raising taxes on individuals, the Rangel bill would reduce corporate tax rates to 30.5% from 35% and eliminate the alternative minimum tax. That would be "paid for" by increasing taxes on hedge funds and buyout firms by about $48 billion.

Federal tax revenues have been rising between 6.7% and 14.5% in each of the past three years, but the proposed tax increases, by slowing rather than stimulating the economy, would ensure that these percentages decline. Hillary Clinton defines the liberal tax policy as "we are going to take things away from you on behalf of the common good," but in the unlikely event that the tax bill passes Congress next year, President Bush's veto pen will surely take away from the liberal leadership things that will do harm to the common good.

On the other hand, the 2008 elections could lead to a very different outcome, for the Rangel bill shows in which direction tax policy will proceed if there is a Democratic president and Congress in 2009.

A much more interesting approach was introduced in the House three weeks ago by Rep. Paul Ryan, a Wisconsin Republican: elimination of the Alternative Minimum Tax, extension of the 15% capital gains and dividend rates that expire in 2010, and giving taxpayers a choice between filing under the current tax system or a new option with just two income tax brackets, 10% for joint filers with incomes less than $100,000 and 25% for those with higher incomes. It includes a $25,000 standard deduction plus a $3,500-a-person exemption, which comes to $39,000 for a family of four. The new option would be a flat-tax choice, with no other exemptions or loopholes, and the AMT would be gone.

Every taxpayer would be able to make a choice between the current tax system with the AMT burden, tax rates from 10% to 35%, and many complex deduction options, or the Taxpayer Choice Act. Mr. Ryan estimates that the federal government's revenues--excluding AMT revenues, the elimination of which would cost the government only about 2.4% of revenues over 10 years--would be about the same as under the current system, and the top 5% and 1% of taxpayers would pay slightly higher taxes than they do today.

Such a system would stimulate the economy, increase economic growth and job opportunities, and simplify a very complex and frustrating current tax system. But for the liberal establishment a flat tax with lower rates would be a very inconvenient truth. Much better in their view are the substantial Rangel tax increases.
Mr. du Pont, a former governor of Delaware, is chairman of the Dallas-based National Center for Policy Analysis. His column appears once a month.

The Reagan Tax Cuts: Lessons for Tax Reform

During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.

Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.

Tax Rates and Tax Revenues
High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton's Council of Economic Advisers in 1994: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth." Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.
A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.

The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.
Conclusion

The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is di sproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.

Christopher FrenzeChief Economist to the Vice-Chairman

Endnotes:
1. Joint Economic Committee, The Mellon and Kennedy Tax Cuts: A Review and Analysis, 1982.
2. Feldstein, Martin and Daniel Feenberg, The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases, NBER, 1995.
Other JEC Reports that deal with this issue:
JEC Annual Report: 1988 through 1994.
Latest Data Show Higher Income Tax Rates Reduce Taxes Paid by the Rich, JEC Report: December 1993.
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