Is Taxing Upper Income People A Good Idea?

Hi Everyone:

There is a lot of talk about what to do with the Bush Tax Cuts. The Democrats want to end the tax cuts for people earning over $250,000. The Republicans want to keep all of the tax cuts in place. Who is right and who is wrong? Or is there a right or wrong in this debate? Lets look at the facts as per the Gannet news:

The final 2 years of the George H. W. Bush presidency brought a creeping recession, with an unemployment rate that increased from 5.6% in 1990 to 7.5% in 1992. By June 1992, just 5 months before the elections, the rate reached 7.8%.

Newly elected President Clinton proposed raising the highest marginal tax rate from 31% to 39.6%. President Reagan's chief economic advisor, Martin Feldstein, said that "raising the tax rate of high-income people would hurt incentives, weaken the economy and waste investment dollars."

As you may or may not remember, there was a fierce debate with a lot of mud slinging and fear mongering. Republicans truly believed that Reagan's trickle down theory, tax cuts for the rich would benefit the middle and lower classes. They claimed that raising taxes during a recession was wrong. Even though Reagan's tax cuts among other things created a huge deficit, they still believed their way was correct.

When the debate ended and the votes were counted, the house voted for the tax increases by a vote of 218 to 216. The senate vote was tied and broken by Vice President Gore. So what were the consequences? In the following 7 years the unemployment rate decreased every year until it reached 4% in 2000. Did the tax increase alone cause the drop in the unemployment rate? Probably not. But the increase went a long way towards closing the budget deficit that Clinton inherited from Reagan and Bush and it also raised the incomes of poor families through the Earned Tax Credit. Both of these factors provided major economic boosts. Also don't forget that by the end of Clinton's presidency, the huge deficit that he inherited was gone and a huge surplus was given to Bush #2.

President George Bush #2, not believing in history repeating itself, slashed tax cuts for all individuals. Then the economy fell off a cliff. The tax revenue lost from the tax decreases helped in part to send this country into the worst recession since the Great Depression.

So what is the correct answer regarding keeping the tax rate for the rich as is, or increase their tax rates? Well, using common sense, it appears to me that raising the tax rates for the rich is good economic policy. It worked in the 1990's, so why wouldn't it work now? How can one argue that the trickle down theory of economics works? History has proven twice that it didn't work. It didn't work for Reagan and it didn't work for Bush #2. If history has shown which way works, why would we want to try a failed policy for a third time? That makes absolutely no sense to me.

Additionally, please don't forget that keeping the tax cuts for the rich will increase the deficit by almost one trillion dollars. If the GOP was really serious about reducing the deficit, which they say they are, the first thing that they should do is to eliminate the tax cuts for the rich and increase their tax rates. You can't argue with history. It is there for us to learn from and not to ignore.

Common sense rules and poor policies drool.

Til next week.