Raising tax rates does not mean that government will collect more tax revenue, despite the “grand illusion that everyone in the media seems to have,” Thomas Sowell, senior Fellow at the Hoover Institution, told Newsmax.TV in an exclusive interview.
Sowell, an expert on tax policy and the economy, has written a new essay called “’Trickle Down’ Theory and ‘Tax Cuts for the Rich.’” The 2012 election cycle has been a rebirth for the “trickle down” discussion. Sowell said that President Barack Obama’s plan to raise taxes on the wealthy won’t help balance the budget.
Watch the exclusive interview here.
“You can raise the tax rate as much as you want, whenever you want but that in no way means that you’re going to collect more tax revenue,” Sowel said. “In fact, any number of times throughout history, and not only in this country but in other countries, people have raised tax rates and the tax revenue collected has gone down.
“It happened in Britain recently when they proposed that 51 percent top rate and they collected less revenue than they did with the lower rate,” he said. “Back in the 1920s, the top rate was 73 percent in 1921. Over the years they brought it down to 24 percent. At 24 percent, they collected far more revenue than they collected at 73 percent. The simple reason is that when the rates get very high, people put their money into tax exempt securities or they invest it in foreign countries or do something else to keep their money from being collected.”
Sowell continued, “Andrew Mellon in the ’20s pointed out that government collected the same amount of revenue when the top tax rate was 13 percent as when it was 65 percent. So the grand illusion that everyone in the media seems to have is if you need more money, you just raise the tax rate and the revenue will come pouring in.”
Sowell said if it were up to him, Art Laffer would be the next Treasury Secretary. “He’s credited with saying, you know, that you could sometimes get more revenue at a lower tax rate but, of course, that same argument was made before Art Laffer was born. It’s just that over the years, people have forgotten it. They’ve forgotten how often the tax rates and the tax revenues have moved in opposite directions.”
On the topic of Keynesian economics — which holds that government should inject capital when the private sector is not doing so efficiently — Sowell said it became a partisan issue toward the end of the 20th century.
“If we back up to the beginning of income taxation, under Woodrow Wilson, back in those days, there was a far more realistic understanding in both political parties that high tax rates don’t necessarily bring in more revenue,” he said. “More importantly, there was an understanding that high tax rates have present repercussion when investors put their money in tax shelters instead of investing in the economy.”
He continued, “Over the years, however, especially toward the end of the 20th century, it became a partisan issue in that the new Democratic Party, the sort of post-McGovern Democratic Party, chose to say that the tax cuts are just for the benefit of the rich. When in fact, the whole point that John F. Kennedy and others lower tax rates cause higher rates of investment and that creates jobs.
"By the same token, if you’re going to raise the tax rate high — and by high I don’t mean high necessarily with regard to historic standards, I mean higher than in other countries--then it pays people with lots of money to put their money in other countries and the jobs go to those other countries. Now, it’s very easy electronically to try to transfer $1 million here or there. It’s not easy for a job seeker to transfer himself to some other country where the jobs have been created.”
It’s a basic fallacy to try to link the major U.S. economic downturns to tax policy, Sowell said, with the latest recession serving as a good example.
“With the recession that we’re in now, it’s quite clear that this is the aftermath of the housing boom which was done in such a way that the bust was absolutely inevitable from the beginning, and this is not hindsight,” he said. “I said this in the Wall Street Journal a couple of years before it happened. And other people said it elsewhere before I did. So this is not something new.”
Liberals also argue that lower tax rates mean the rich get richer and the poor suffer more. Sowell said he doesn’t “worry about the rich getting richer. I do worry about the poor getting poorer, and that’s what’s been happening on a much larger scale.”
“The difference between reality and political impression is huge,” he continued. “Back in the 1980s, that was during the Reagan administration, the income gap between blacks and whites narrowed somewhat. Under Obama, it is widened. And yet, Obama’s regarded as a great president by blacks and he will undoubtedly get a huge proportion of black votes. Ronald Reagan was never regarded that way. So we have a set of visions out there that operate independently of fact.”
If Obama was truly committed to helping the poor, he would be for lower taxes, Sowell said.
“He would also not be creating all kinds of bureaucratic regulations which are still be promulgated,” he said. “They haven’t even finished. So there wouldn’t be this huge amount of uncertainty facing anyone who wants to invest in a business. You have no idea how much it’s going to cost you to hire somebody, for example, until all of the regulations of Obamacare are promulgated, and that can take years.”
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