The Free Market 24, no. 11 November( 2004)
Ludwig von Mises wrote in 1922 that “nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich.” He also said that such a policy creates nothing. It is a purely destructive act that results in capital consumption.
Also shedding light on the topic is a book written five years later by Sigmund Freud. It is called The Future of an Illusion. Freud was talking about the illusion the infant has about its parents, who seemed to be so all-powerful. That unique title seems to fit the constant call for increased taxes on those earning over $200,000, thereby raising new revenues for the government to spend. It appears to policy-makers that taxes on the rich are all-powerful. In reality, that is an illusion.
The idea to tax those who make more than $200,000 a year is a longstanding strategy for getting votes. But that is all it is good for. It won’t raise revenue even though on its face it should, but in the real world, it is just a political ploy. The rich have always had the wherewithal to avoid excessive taxation. They just rearrange their affairs to avoid taxation, something the middle classes are not able to do.
The middle classes have always been the only dependable source for taxes. If a government really wants revenue, that is where they have to go. Tax historians have noted this for centuries.
Ronald Reagan’s tax planning is just one simple example of how the rich can easily avoid the upper tax brackets. Someone noticed what a fine golf swing Reagan had, and the answer was that when he reached the top tax bracket, he stopped working and played golf for the rest of the year. Many wealthy doctors (and others) do the same thing, closing down their medical practice around August and then taking a vacation from earning money for the rest of the year. A government cannot force a wealthy taxpayer to work if the taxpayer finds the tax rates personally intolerable, especially if they are targeted for attack.
Others, with smart accountants, using many forms of sophisticated tax planning, easily avoid the impact of high tax brackets. If Congress goes along with a plan to greatly increase taxes on earnings above $200,000, we can expect a flood of deferred compensation plans covering earnings above that figure. The rich will use what the Treasury recognizes and calls the “Rabbi Trust,” since it was first formulated for a rabbi, and later became a Treasury approved tax-deferral device for everyone.
However, the Rabbi Trust and Reagan’s golf habits are, as any competent tax practitioner knows, just two of many routine ways to avoid Kerry’s soak-the-rich tax strategy. The possibilities are legion.
History is full of amazing examples, like the first income tax in the United States, in 1916, when the top bracket was 7 percent; a few years later the top bracket was raised to 77 percent, or 11 times higher. Yet the 77 percent rate did not produce 11 times as much revenue; in fact it shocked the Treasury by producing almost the same revenue as the 7 percent rate did. At the 7 percent top bracket, about 1,300 returns were filed; with the 77 percent top bracket, only about 250 returns were filed. Where did all the top bracket taxpayers go? The rich simply rearranged their affairs to avoid the 77 percent tax rate.
In May of 1894, when Britain adopted the first progressive tax rates, the London Times astutely observed: “Single out the big and moderately big properties for attack, and very soon, as if by magic, they will begin to evade you and disappear, as all things in the world very reasonably do when they are singled out for attack. Even the half starved crow will not wait to be continuously shot at.”
Thirty years later, President Calvin Coolidge learned the truth of the Times observation when the United States Internal Revenue Bureau informed him that high progressive rates lead us to “the point of getting nothing at all.” It was this amazing phenomenon that prompted the Secretary of the Treasury, Andrew Mellon, to propose a Constitutional amendment to cap tax rates at 25 percent, considered to be the rate that would produce the greatest amount of revenue for the government. Once the rate exceeded 25 percent, tax planning would kick in gear, and revenues would decline. Even the American Bar Association supported this amendment.
Again, if soak-the-rich tax policy becomes law, we can predict with certainty that most of these taxpayers will disappear, “as if by magic.” And the middle class, just as certain, will have to “pick up the tab,” as the saying goes. That is not an illusion. That is reality.
Finally, after World War I, when France’s war-time premier, George Clemenceau, was leaving America following lectures at America’s leading universities, he was asked if he had any complaints about Americans. He said, “Yes, there were two: They make a lousy cup of coffee, and they are appallingly ignorant of history.”
That is still true when it comes to taxes. America is one of the only countries in Western Civilization where there are no courses on tax history at our universities. We are appallingly ignorant of tax history. If we knew our history, we could see soak-the-rich plans for the folly that they are.
Charles Adams is author of For Good and Evil: The Impact of Taxes on the Course of Civilization (cadams000@sympatico.ca).
