A 49 Percent Top

September 3, 1962

The basic disagreement in all the recent dispute about a tax cut reduces itself to this: Should a tax cut be accompanied by at least a corresponding cut in expenditures, or not? For all parties to the debate agree on one thing: Present taxes are too high.

This was admirably put by President Kennedy in his television address of Aug. 13: “Our present tax system is a drag on economic recovery and economic growth, biting heavily into the purchasing power of every taxpayer and every consumer. . . . Our tax rates, in short, are so high as to weaken the very essence of the progress of a free society—the incentive for additional return for additional effort.”

In this statement lies the key to the kind of tax cut most likely to provide incentives and stimulate economic growth. It is a reduction of the exorbitant tax rates on productive enterprise and on the higher incomes.

The rates on personal income now range from 20 to 91 percent. A cut in the 20 percent rate to 15 percent, now widely advocated, would result in a serious loss of government revenues. Such a 25 percent cut in the basic rate would probably reduce the yield from personal income taxes by nearly the same percentage. But the case would be obviously different in the rates ranging from 50 percent up to 91 percent.

MONEY FOR THREE DAYS

All the income-tax rates above 50 percent, in fact, today yield a revenue of less than $1 billion—or no more than the Federal government now spends every three or four days. To halt the progression of the personal income-tax rates at 50 percent would restore, to the most productive element in the country, “the incentive for additional return for additional effort.” Not only would there be no significant loss of government revenues but probably a very substantial increase. Much more important, such a reform would mean an increase in national output and income, and in the rate of economic growth.

In Sweden, some years ago, a prominent industrialist said to me: “We in Sweden consider any tax rate over 50 percent to be confiscatory.” It seemed a good rule of thumb. If we want to make it more precise, there would be a clear practical and psychological advantage in setting the top personal income-tax rate at 49 percent. For then every taxpayer would feel, in considering a new venture, a new investment, or added personal effort, that he could count on keeping “most” of what he earned.

Many readers, long accustomed to our present confiscatory rates on higher incomes, may be shocked by any proposal to cut these down to a top rate of 49 percent without at the same time making a corresponding cut in the rates on lower incomes. Certainly there is a strong case for reducing these rates too—when and if expenditures are also cut enough to make this possible without unbalancing the budget.

FOUR REASONS WHY

But the case for an immediate cut in the tax rates above 49 percent, even without other tax reductions, is fourfold: (1) The rates between 50 and 91 percent do not in fact produce revenue, but reduce it. (2) The rates above 50 percent discourage effort and investment and reduce employment and economic growth. (3) These rates encourage many voters to tolerate government extravagance under the illusion (and the figures show that it is an illusion) that only “the rich” are paying for it. (4) The rates are grossly discriminatory and inequitable. They serve no purpose except to gratify envy and malice.

Some economists, in fact, are now coming back to the view that it is hard to justify, either on grounds of justice, revenue production, or economic growth, anything but a simple proportional or flat rate of income tax. Do 90 percent of the voters have a right to impose discriminatory and punitive taxes on the other 10 percent? Prof. Milton Friedman of the University of Chicago has calculated that a flat tax of 23½ percent on taxable income, as presently defined, would yield as much revenue as the present highly graduated rate.

To halt the present tax progression at a top rate of 49 percent would increase government revenues, restore business confidence, and increase economic growth at one simple stroke.