Sunday, December 4, 2011

Kennedy got it right...

Warren Buffet's gripe goes like this: If a rich guy makes say $2 million (net) this year, of which ordinary income (wages, interest, etc.) amounts to $500k, and the remaining $1.5 million results from sale of stocks, real estate, etc., his effective Federal tax rate would be a mere 19%, as follows:

Capital Gains Tax (15%): $225,000
Ordinary Income Tax (35% top marginal): $146,574

Total Tax: $371,574 (19% effective tax rate)

No one would dispute the fact that Mr. Buffet has been a blessing to the business of America... He has employed capital to the betterment of himself and his fellow man... And being the generous soul he be, he would like to see the tax code changed so that those who have achieved great success (notice I don't characterize them as "fortunate") pay a larger percentage of their income in taxes... He would get his wish if the government would simply end the tax break for capital gains...

Here's how allowing the capital gains tax break to expire (set to on 12/31/2012), assuming no new legislation keeping it [at all] below ordinary income rates, would look for our $2 million earner:

Capital Gains Tax (35%): $525,000
Ordinary Income Tax (35% top marginal): $146,574

Total Tax: $671,574 (34% effective rate)

Or, what if we, as some suggest, compromise and go back to the heydays of President Clinton? Many pundits are quick to remind how well the economy did during the '90s, while tax rates were considerably higher... Here's how the $2 million would've been taxed at the end of Clinton's reign (he did lower the cap gains tax from 28 to 20% by the way):

Capital Gains Tax (20%): $300,000
Ordinary Income Tax (39.6% top marginal): $171,349

Total Tax: $471,349 (24% effective rate)

The question is, was it the booming private sector or income tax rates (higher on all income levels by the way) that created the '90s economy? Dumb question, I know...

There's no debating that we had a great economy in the '90s... Revenue poured in as productivity gains (all the new technology) made companies famously profitable... Tech sector spending/investment (not public sector spending) of course led the way to a balanced budget...

So the question for today is; would we be wise to raise taxes (on any level of income) at this juncture? I.e., would we be better served by supporting the public sector or the private sector?

Here's how John F. Kennedy handled things back when he presided over an economy struggling its way out of recession. His plan, enacted the year he died (1963), preceded "a boom that lasted through the 1960s and into the 1970s"... We don't need leaders committed to bringing both sides together, we simply need leaders committed to commonsense... Were today's left to follow Kennedy's lead, today's right would have no choice but to follow as well...

Highlights of his remarks to the Economic Club of New York on Dec. 15, 1962... (excerpted from an abridged version of his speech featured in November 25th's Investors Business Daily)... I highly recommend you read the full text:

"the most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand - to cut the fetters holding back private spending.

In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion.

It could also be done by increasing federal expenditures more rapidly than necessary, but such a course would soon demoralize both the government and our economy... If government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency.

The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system - and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes to be enacted and become effective in 1963...

In short, to increase demand and lift the economy, the federal government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures...

I am confident that the enactment of the right bill next year will in due course increase our gross national product by several times the amount of taxes actually cut. Profit margins will be improved, and both the incentive to invest and the supply of internal funds for investment will be increased. There will be new interest in taking risks, in increasing productivity, in creating new jobs and new products for long-term economic growth.

It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now... The experience of European countries and Japan has borne this out. This country's own experience with tax reduction in 1954 has borne this out. The reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy that can bring a budget surplus.

Our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy, or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues and achieve, I believe - and I believe this can be done now - a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future..."


  1. Common sense is nowhere to be found in Washington or Sacramento. I don't have a degree in economics, but I know that full employment will generate more taxes. To get full employment, eliminate the useless, burdensome regulations.
    Marty,you are gong to like this one: Some of the Christmas light in the Hall of Congress don't work, and the rest are not very bright.

  2. Amen Hans!