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109 IRET Byline 1 (1992)

handle is hein.taxfoundation/iretbyln0109 and id is 1 raw text is: December 28, 1992 No. 109 The High Costs of Soak-the-Rich Taxation During his Presidential campaign, Bill Clinton insisted that wealthier people should pay more individual income taxes. According to Mr. Clinton and his advisers, taking more money from upper- income individuals would be fair, easy, and cause little, if any, harm to the economy. In fact, they are wrong on all counts. Steeper taxes on upper-income individuals would not be fair. Most of the added revenues that the incoming administration thinks is there for the taking would never materialize. The heavier taxes would damage the economy and would hurt everyone. The maneuver would also increase the middle class's political exposure to higher taxes. The call for higher tax rates on upper-income individuals follows a path that Congressional Democrats embarked on before the ink was even dry on the Tax Reform Act of 1986. They have been trying to raise tax rates while retaining the drastically expanded definition of taxable income contained in the 1986 act. In early 1992, for instance, Congressional Democrats passed a tax bill (which President Bush vetoed) that would have added a fourth tax bracket of 36%, tacked on a 10% millionaires' surtax, extended the phase-out of itemized deductions and personal exemptions for upper-income individuals, and barred companies from deducting compensation to any executive in excess of $1 million. The notion that higher-income people are not paying their fair share of income taxes ignores the Institute for Research on the Economics of Taxation IRET, Bylin disproportionate share of taxes they already pay. In 1990, the top 1% of tax filers paid about one-quarter of all individual income taxes, the top 2% paid about one-third, and the top one-half of filers paid over 90%. Far from getting off lightly, upper-income individuals pay the lion's share of individual income taxes. Indeed, it is plausible to argue from the numbers that if anyone is being taken advantage of by the tax system, it is upper-income individuals. They contribute much more in taxes than do other people and their taxes take a disproportionately larger share of the fruits of their labor and saving. Denying people, solely on the basis of their income, legitimate personal exemptions and itemized deductions that are available to everyone else is blatantly discriminatory. Although extending these disallowances is an integral part of many fairness packages, such selective disallowances are the epitome of unfairness. The proposal to limit the deductibility of executive compensation would violate a core principle of sound income taxation: expenses, including payroll costs, should be deducted in computing taxable income. This attempt at government micromanagement of compensation would also send the perverse message that Washington thinks business executives, whose decisions play such a large role in determining America's job outlook and competitiveness, are somehow less important than top athletes, actors, and rock stars, whose salaries would not be subject to the cap. Ironically, to the extent that the cap would raise major corporations' tax bills, the middle class would foot much of the tab because they have large corporate holdings through pensions, mutual funds, and direct stock ownership. Those who contend that higher-income individuals deserve to be taxed more heavily should be required to explain how they define fairness before their demands are written into law. In the absence of an objective definition, fairness is an out-of-control concept with no logical stopping point; it is used to rationalize any degree of income redistribution, no matter how extreme. There is no solid, objective basis for IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

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