We Need Tax Relief

By Stephen J. Dunn

Our country has proved time and again that a tax cut can energize our economy and bring us out of a recession.

In 1921, returning soldiers had swelled the unemployment ranks to 11.3% of the workforce,[1] the top individual income tax rate was 73%,[2] and the country was in a recession.  Andrew Mellon, President Harding’s Treasury Secretary, proposed cutting income tax rates to stimulate the economy.  The idea is that allowing people to keep more of their income motivates them to produce more income, and the more income people realize, the more income the government has to tax.

Congress responded, lowering the maximum individual income tax rate to 58% in 1922,[3] 46% in 1924,[4] and 25% in 1925.[5] The tax cuts worked.  The unemployment rate fell steadily through the 1920s, to 2.9% in 1929.[6]

In 1932, President Hoover hiked income tax rates, the top individual rate to 63%.[7]The country descended into the Great Depression.

The corporate income tax rate was raised to 13-3/4% in 1934.[8]

Income tax rates were hiked again in 1936, the maximum individual income tax rate to 79%, and the top corporate rate to 15%.[9]

The unemployment rate remained high through the Depression years:

When President Kennedy took office in 1961, the maximum individual and corporate income tax rates were 91% and 52%, respectively, and the country was again in a recession.  To spur the economy, President Kennedy proposed an investment credit.  The credit would provide a dollar-for-dollar tax credit equal to 7% of the cost of new tangible, depreciable personal property placed in service.  The depreciable basis of the property would be reduced by the amount of the credit.  Congress responded by enacting such an investment credit as part of the Revenue Act of 1962.[11]

President Kennedy also proposed cutting individual income tax rates across the board by 30%, cutting the top corporate income tax rate from 52% to 48%, and cutting the capital gain tax rate from 25% to 19.5%.  President Kennedy’s vision became law in the Revenue Act of 1964.[12]

The unemployment rate fell from 6.7% in 1961 and remained low through the 1970’s:

The Kennedy tax cuts are associated with the longest period of economic expansion in our nation’s history.  Of course, the Viet Nam War also had something to do with that economic expansion.

President Reagan proposed sweeping tax cuts to lift the country out of a recession when he took office in 1981.  The Economic Recovery Tax Act of 1981 cut the maximum individual income tax rate from 70% to 50%, and the top corporate income tax rate from 48% to 46%.[14] The Tax Reform Act of 1986 compressed corporate income tax brackets, and cut the top corporate rate to 34%.[15]

The economy responded to the Reagan tax cuts.  The unemployment rate declined steadily from 9.7% in 1982 to 5.6% in 1990.[16]

Unemployment in the U.S. in 2010 has ranged from 9.5% to 9.7% of the workforce.  In August 2010 it was 9.6%.[17] These rates do not include people who had given up looking for employment or who were able to find only part-time work.

Clearly, significant income tax relief would stimulate our economy and lower our unemployment rate.

Our present income tax rates are unrealistically high.  Our 39.5% combined Federal and average State corporate income tax rate is surpassed only by Japan.  Most countries are at least ten percentage points lower.

Excessive income tax rates motivate companies to form subsidiaries in low-tax foreign jurisdictions, and ship their manufacturing work there.  The earnings escape U.S. income tax indefinitely, until distributed to the American parent company (this is called “deferral”).  This cannot be good for our economy.

Our maximum Federal income tax rate on individuals currently is 35%.  With Social Security tax and state income tax, over 50% of my income goes out in income taxes.  This does not include sales tax or real property tax.

Excessive income tax rates encourage tax gamesmanship and evasion.  Individuals and small businesses taxpayers commonly evade income tax by conduct such as charging personal expenses to their business or failing to report income.  A law dishonored by most people is not a good law.

Noncompliance with tax laws increases the cost of administering those laws.  The IRS must hire and train additional revenue agents (auditors) and revenue officers (collectors).

As pressure mounts on the IRS to collect tax, its employees take more and more aggressive tax collection action.  In one case, a man bought a house, paying the entire purchase price himself.  But his mother’s name was mistakenly included on the deed with him as a co-grantee.  To correct the mistake, the mother executed a quit-claim deed to the son with respect to the house.  The IRS has asserted that the son is a mere “nominee” of the mother as to the house, and seeks to seize the house to collect the mother’s tax liabilities.  The IRS has issued a Notice of Federal Tax Lien against all of the son’s “property and rights to property,” and recorded it in the local Register of Deeds’ office.   This action disables the son from selling or mortgaging property, and impairs the son’s ability to gain new employment.  The son is suing the IRS for wrongful collection action.  The IRS is counterclaiming to foreclose on its alleged tax lien in the son’s house—very misguided.  If the son prevails, and he expects to, the court will adjudicate his property free of Federal tax lien, and award him his attorney fees.

To bring the country out of the present recession, we need sharply reduced income tax rates.  Far from cutting taxes, the Obama administration is executing an aggressive campaign to increase income taxes. The Health Care and Education Reconciliation Act of 2010[18] levies a surtax of 3.8% on net investment income of individuals and the undistributed net income of trusts and estates, in addition to otherwise-applicable income tax on such income.[19] The recently-enacted Patient Protection and Affordable Care Act[20] levies a surtax of .9% on wages[21] or self-employment income[22] in excess of $250,000 per year on a joint income return or in excess $200,000 per year on a single individual’s return, in addition to otherwise-applicable income tax on such income.

The Obama Administration proposes a punishing series of tax increases against against “high earners”―married individuals earning more than $250,000 (more than $125,000 on a separate return) and single individuals earning more than $200,000 (the dollar amounts would be indexed for inflation).  The proposals include:

• Reducing itemized deductions by up to 80%, and limiting their benefit to 28% of taxable income.[23]

• Phasing-out personal exemptions.[24]

• Raising the long-term capital gain tax rate from 15% to 20%.[25]

Tax cuts enacted in 2001 will expire on December 31, 2010, raising all individual income tax rates, the top individual rate to 39.6%.  The Obama administration has proposed continuing the 2001 tax cuts, for everyone except high earners.[26] Congress recently adjourned until after the November elections without taking any action to extend the 2001 tax cuts.

High earners are the people who take risks, employ people, and create wealth.  Increasing the income tax burden on them discourages economic activity.

Our income tax rates are unrealistically, oppressively high.  To make our country more competitive and productive, to restore our country to economic strength, we need not tax increases but significant tax relief.

[1] Historical Statistics of the United States, Table Ba470-477:Labor force, employment, and unemployment, 1890-1990, http://0-hsus.cambridge.org.

[2] Id.

[3] Revenue Act of 1921 §§ 210, 211, 42 Stat. 227,  233-37 (Nov. 23, 1921)

[4] Revenue Act of 1924 §§ 210, 283, 43 Stat. 253,  264-67, 303 (June 2, 1924).

[5] Revenue Act of 1926 §§ 210, 211, 286, 44 Stat. 9, 21-23, 69  (Feb. 26, 1926).

[6] Historical Statistics of the United States, Table Ba470-477: Labor force, employment, and unemployment, 1890-1990, http://O-hsus.cambridge.org.

[7] Revenue Act of 1932 §§ 12, 65, 47 Stat 169, 174-77, 191 (June 6, 1932).

[8] Revenue Act of 1934 §§ 13, 803, 48 Stat. 686, 772 (May 10, 1934).

[9] Revenue Act of 1935 §§ 101, 102, 107, 49 Stat. 1014,  1015, 1019 (Aug. 30, 1935).

[10] Historical Statistics of the United States, Table Ba470-477: Labor force, employment, and unemployment, 1890-1990, http://O-hsus.cambridge.org.

[11] 76 Stat. 960 (Oct. 16, 1962).

[12] 78 Stat. 19 (Feb. 26, 1964).

[13] Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, http://data.bls.gov.

[14] Economic Recovery Tax Act of 1981 §§ 101 231, 95 Stat 172, 176, 185, 249-50 (Aug. 13, 1981).

[15] Tax Reform Act of 1981 § 601, 100 Stat. 2085, 2249 (Oct. 22, 1986).

[16] Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, http://data.bls.gov.

[17] Id.

[18] P.L. 111-152 (Mar. 30, 2010) (“HCERA”).

[19] IRC § 1411 added by HCERA § 1402(a)(1).

[20] P.L. 111-148 (Mar. 23, 2010) (“PPACA”).

[21] IRC § 3101(b)(2), added by PPACA § 9015(a)(1)(A)-(D).

[22] IRC § 1401(b)(2), added by PPACA § 9015(b)(1)(A)-(B).

[23] Id., 129, 132.

[24] Id., 230.

[25] Id., 131.

[26] Department of the Treasury, General Explanation of the Administration’s Fiscal Year 2011 Revenue Proposals (Feb., 2010),http://www.treas.gov/offices/tax-policy/library/greenbk10, 127.