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“Where’s the Beef” in the Tax Code

12/05/2012

Like country music, I was Supply-side before Supply-side was cool!

You’ll recall Supply-side economics argues that, at some point, income tax rates can become so high that it hurts the economy and actually reduces the revenue received by the government.  (Of course, there is plenty of argument about where that point is.)

I taught the first class on Supply-side economics for the American Institute of Banking and even had lunch with the father of Supply-side economics, Arthur Laffer, back in 1979.  I embraced Ronald Reagan when he embraced Supply-side economics.

Later, like different medicines treat different physical problems, I learned that different economic strategies treat different economic problems.  I learned that Supply-side economics is most helpful with a “lumbering” economy, not with a “recovering” economy nor a “roaring” one.

So, I understand Supply-side economics!  But, for the life of me, I don’t understand why Republicans are being so adamant about the marginal income tax rate instead of the effective income tax rate.  The marginal income tax rate is the tax rate paid for the highest dollar earned.  Most people are in the 28% tax bracket, which means they pay another 28 cents in extra tax for every additional dollar they earn.

I care a great deal more about the total amount of income taxes I pay.  Assuming my income is unchanged, I would rather be in the 99% tax bracket and pay $50,000 in taxes — than be in the 28% tax bracket and pay $60,000 in taxes!  Who cares about the rate when the bottom line is more important?

The Republican argument is that Americans will stop working if their tax bracket increases from 36% to 39.7%.  Funny, I don’t recall many workers quitting when rates got as high as 91% in the 1970’s.  (Maybe, people work for many reasons besides mere take-home pay, especially men?)

The Democratic argument is that there is not enough additional revenue by limiting deductions for “high-income” taxpayers, and they must therefore increase the highest marginal tax rate as well.  Frankly, I don’t believe one word of that.  (Those who believe all motives are sinister suspect Democrats are not as anxious to limit some deductions because those deductions benefit taxpayers who mostly live in “blue” states.)

There is an obvious deal to be done here, by hiding in the complexity of the Internal Revenue Code.  Of course, there are also political points to be scored, and we all know which is more important.

In the classic 1984 Wendy’s commercial, Clara Peller asked “where’s the beef?’

My question is “”what’s the point?”

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