|Cato Policy Analysis No. 192||April 8, 1993|
by Bruce Bartlett
Bruce Bartlett, former deputy assistant treasury secretary for economic policy, is a visiting fellow at the Cato Institute.
President Clinton has proposed a major increase in federal income tax rates, especially for the rich. His stated reason for that action is that the rich benefited disproportionately from the tax-rate reductions of the 1980s and thus are not paying their fair share. In fact, lower tax rates in the 1980s led to higher, not lower, revenues from the rich. The top 1 percent of taxpayers ranked by income, for example, paid over 25 percent of all federal income taxes in 1990, compared to less than 18 percent in 1981.
The history of tax-rate increases shows that they seldom produce much revenue. Their principal effect is to make higher taxes on the poor and the middle class more palatable. In fact, because of inflation and real growth of the economy, in just a few years tax rates originally imposed on the rich often apply to those with middle incomes. The rich, meanwhile, often evade higher rates by making increased use of deductions and other legal tax shelters. Moreover, higher rates tend to encourage Congress to add new deductions to the tax code.
The Clinton plan, therefore, is based on false premises and is unlikely to achieve the goal of increasing the tax burden on the wealthy. It will probably lead, instead, to higher taxes on the poor and the middle class, as higher revenues from the rich fail to materialize. In the end, the burden of higher taxes must fall largely on the middle class because that is where the bulk of income is. Thus, maintaining a low top tax rate is the best way to ensure that tax rates remain reasonable for those with low and moderate incomes.
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© 1993 The Cato Institute
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