President Bush unveiled a very modest tax cut plan last week that calls for the elimination of double taxation on dividends.  Democrats immediately attacked the plan using class warfare tactics, clamoring that only the rich will benefit from a dividends tax reduction.  This tired argument ignores the millions of middle class American investors who receive dividend checks and presumably don’t consider themselves wealthy.  It also ignores the stimulative effect that any form of tax cut has on the economy.  When dividends are taxed only once, as corporate income, investment is encouraged and shareholder demand for dividends increases.  This in turn encourages companies to increase profits, because it’s hard to pay dividends if you’re not making any money.  But these arguments require some analysis, and the left would rather appeal to base emotions and attempt to paint the wealthy as sinister tax dodgers.

As with so many things in politics, the truth is exactly opposite.  The so-called rich pay almost all of the income taxes in this country.  In fact, the top 1% highest-earning Americans pay a whopping 37% of all individual income taxes collected.  The top 10% pay 67%.  In other words, 10% of Americans pay two-thirds of the taxes.  Half of all taxpayers – those in the bottom 50% of earnings – account for less than 4% of income tax revenues.  This means no matter how taxes are cut, it’s nearly impossible for those cuts to primarily benefit lower-earning taxpayers.  Tax cuts necessarily benefit those who pay the overwhelming bulk of the taxes.  This simple truth allows the left to attack each and every tax cut proposal on the grounds that it disproportionately benefits the rich.

Yet we have exactly the kind of steeply progressive tax system championed by Karl Marx.  One might expect the left to be happy with such an arrangement.  At its core, however, the collectivist left in this country simply doesn’t believe in tax cuts.  Deep down, they believe all wealth belongs to the state, which should redistribute it via tax and welfare policies to achieve some mythical “social justice.”  When people complain about having thirty to fifty percent of everything they earn devoured by taxes, the collectivists just shrug.  They honestly believe it should be more, much more.  

The class war tactic highlights what the left does best: divide Americans into groups.  Collectivists see all issues of wealth and taxation as a zero-sum game played between competing groups.  If one group gets a tax break, other groups must be rallied against it – even if such a cut would ultimately benefit them.  Yet the class warriors forget that American wealth is not static, but rather very dynamic.  Poor people become rich, and rich people lose all of their money.  In fact, at no time in American history have more of the nation’s wealthy earned rather than inherited their money.  Rich family dynasties are increasingly rare, and are quickly destroyed by unproductive spendthrift generations.  So when the left attacks the rich, they’re attacking a fluid group that many poor Americans hope to join someday by moving up in life.  Upward mobility is possible only in a free-market capitalist system, whereas collectivism dooms the poor to remain exactly where they are.

I’m in favor of cutting everybody’s taxes – rich, poor, and otherwise.  Whether a tax cut reduces a single mother’s payroll taxes by forty dollars a month, or allows a wealthy business owner to save millions in capital gains, the net effect is beneficial.  Both either spend, save, or invest the extra dollars, which helps all of us infinitely more than if those dollars were sent to the black hole known as the federal Treasury.  The single mother desperately needs those extra dollars, and that’s why we should reduce or eliminate her payroll taxes.  As for the wealthy business owner and whether he “needs” the extra dollars, I’ll simply relate the old adage of the man who said “I’ve never had my paycheck signed by a poor man.”

January 22, 2003