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Flawed Republican Theory on the Top Tax Rate​​​​

With all of the talk about the looming fiscal cliff, a debate has been spurred about the taxes that the wealthy pay. This debate centers on the top tax rate. This is the tax rate for the highest income bracket. Republicans have been fighting since before the election to keep the rates at the present lows. They even proposed lowering them further in an attempt to spur job growth. Their theory was that the wealthy business owners would be able to hire more workers with the savings from lower tax rates. This same theory criticized Democrats for wanting to raise the top tax rate by claiming that higher rates would be devastating to the job market. As usual, the Republican theory is wrong.


A look at the history of the top tax rate will show the flaws in their theory. The current rate of 37.9 percent is the lowest that this rate has been since 1992, when the first President Bush was in office. During that time, our economy only added slightly over 2.5 million jobs and the top tax rate averaged 32.5 percent. Compare that to the following eight years under President Clinton, which had an average top tax rate of 43.7 percent. Those years saw an addition of over 23 million jobs. This proves that an increase in the top tax rate does not destroy the job market. In fact, the top tax rate seems to have very little or no effect on economic growth. This was also the conclusion reached by the Congressional Research Service, a non-partisan branch of the Library of Congress, in a report prepared this year. Of course, this report was quickly suppressed by Republicans.


If that is not enough to show that the Republican theory on the top tax rate is wrong, the budget should provide the evidence needed. One of the main battle cries of conservatives lately has been that we cannot keep running deficits. They contend that we must run a surplus to pay down our debt. Since 1940, our federal government has run a surplus only 12 times. During the years that we had a surplus, the average top tax rate was 72.2 percent. There are three ways to create a surplus. One is to cut spending dramatically. Another is to generate more revenue through taxes. The third is to do a combination of the first two. The final option is what Democrats have proposed. Republicans have stringently refused to consider any option that includes an increase in taxes for the wealthy. Unfortunately, for Republicans, our history shows that we must have a higher top tax rate to bring enough revenue in to create a surplus. The simple fact is that we cannot cut our way to a surplus.


For most people, an analysis of the top tax rate history and simple arithmetic would be enough to show them why these increases are necessary. However, as the election proved, logic and arithmetic do not seem to be assets available to Republicans. This is why many business executives have recently come out in support of an increase in the top tax rate. Executives such as Warren Buffett (CEO, Berkshire Hathaway) and Fred Smith (CEO, Fed Ex), among many others, have come out and stated that an increase in the top tax and capital gains tax rates (another tax that has a great effect on the wealthy) is going to be necessary.


David Langstaff (CEO, TASC) stated at a recent gathering of top defense executives that, “this is a fairness issue — there needs to be recognition that we’re not collecting enough revenue. In the last decade, we’ve fought two wars without raising taxes. So I think it does need to go up.”


Another executive, Joe Echverria (CEO, Deloitte LLP) discussed the issue after a meeting with President Obama at the White House. Echverria said, “There needs to be some revenue element to this, and [Obama] started with rates. And he started with rates on what we would define [as] the upper two percent … that we have to pay our fair share. And I think everybody was in agreement with that notion.”


This means that we have history, arithmetic, and now the very executives that will be affected supporting the increase. Fortunately, recent reports are stating that Republicans are finally coming around. Many have begun to accept the fact that wealthy Americans will need to pay more taxes for our country to avoid financial disaster. The fact is that it will happen. Republicans lost the argument on November 6 when they lost the election. We are now simply in the painful process of making conservatives face reality.


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