Some Advice For The Two Presidential Candidates

Politicians—the Washington gang that includes the House, Senate and president—are forever talking about raising or lowering the income tax rate. It’s election time, which means it’s really the silly season for floating “what’s best for the country” income tax rate ideas. Every once in a while, the same politicians will babble a bit as to how we should change, kill or modify the estate tax law.

Columns From: 10/14/2008 Modern Machine Shop,

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Politicians—the Washington gang that includes the House, Senate and president—are forever talking about raising or lowering the income tax rate. It’s election time, which means it’s really the silly season for floating “what’s best for the country” income tax rate ideas. Every once in a while, the same politicians will babble a bit as to how we should change, kill or modify the estate tax law.

Let’s take ‘em (the income tax law and the estate tax law) one at a time. Maybe we can help these seemingly helpless elected officials get it right.

First, we’ll deal with income tax. The logical reason for tinkering with the income tax rate is to raise more revenue. But during election season, the real reason for adjusting the tax rate is to get the candidate the most votes.

Raising the tax rate will mean more revenue, right? This is the claim of the politicians pushing for a higher rate. “No, no,” says the other side. Lowering the income tax rate will increase the tax base, resulting in more revenues. Simple logic tells you there is no way both sides can be right.

Let me offer some fresh new evidence, and then you can decide who is right. My information comes from an article that blew my socks off. The article, titled “You Can’t Soak The Rich” by David Ranson, appeared in the May 20, 2008 issue of The Wall Street Journal.

The article introduces “Hauser’s Law,” originally created by Burt Hauser, an economist who published new data about the federal tax system in 1993. Hauser’s Law (HL) states: “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of Gross Domestic Product (GDP).”

At the center of Ranson’s article is a chart that explains HL. The chart only has two tell-all lines. The first of these lines is the “top individual tax bracket,” which spans the years 1950 through 2007. This number stays around 90 percent from 1950 through about 1954; then it stays around 70 percent until the mid 1980s. From the mid 80’s through the 90’s, the number fluctuates between 50 and 30 percent. From 2001 until today, it has remained at a steady 35 percent. This tax-bracket line is all over the map.

The second line on this chart shows “revenue as a percentage of GDP.” This is almost a straight line, holding at about 19.5 percent.

The 19.5 percent tells you the federal income tax “yield” (tax revenue divided by GDP). This seems easy enough. You don’t have to be a rocket scientist to see what HL means—raising tax rates lowers GDP. “Higher taxes reduce the incentive to work, produce, invest and save, thereby dampening overall economic activity and job creation,” Hauser says.

The most interesting thing about HL is that it is fact, not theory—a fact that has given specific, consistent and proven results with 57 years of easy-to-verify data. So the obvious conclusion is that raising taxes reduces GDP, resulting in lower yield (tax revenues); and lowering the income tax rate increases GDP, as well as tax revenues.

Now, let’s take a quick look at the robber-like estate tax. In 2008, there’s no tax on the first $2 million of your estate. This figure rises to $3.5 million in 2009. Then, absolute stupidity takes over. There is no tax in 2010, and finally, in 2011, only the first $1 million is tax free. The top estate tax rates are 45 percent for 2008 and 2009; zero for 2010; and the insane rate of 55 percent for 2011 (and thereafter).

The “2010-no-estate tax law” can’t survive. It’s too risky politically. Neither candidate for president has expressed an interest in killing the estate tax, which is what Washington should really do but does not have the courage to do so. I know in my heart that the estate tax will survive at least the next 4-year administration, so
here are my suggestions to Congress and the new president:

(1) Make the freebie $3.5 million permanent, which means a married couple with $7 million of net worth could easily eliminate the estate tax.

(2) Lower the top estate tax rate to 35 percent. Whatever the president and Congress finally do about the estate tax, you know that my network and I have devised a system that eliminates the estate tax. The system always works, whether you are worth $4 million or $40 million (or more). Best of all, the system is easy to implement (no matter how complicated your situation), is always 100 percent effective and is legal.

Finally, here’s my advice to the two presidential candidates and members of Congress concerning the income tax: Keep your eyes on the real ball—the GDP. Stop chasing higher or lower tax rates. Your job is to govern in such a way as to increase GDP. HL gives you proof that increased income tax revenues always follow. Now for everyone who is reading these words, your job is to pass this this information about HL to your congressional representatives and senators.

When you vote for president this November, apply the wisdom of Hauser’s Law to what the candidates say they are going to do about income tax rates. 

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