York's Morning News
Thursday, November 1, 2012
5 days to the Election
SPECIAL GUEST HOSTS TODAY are Matt Brouillette, President and CEO of The Commonwealth Foundation, and Charlie Gerow, President Quantum Communications
Thursday- 11/1/12
6:10-6:15- Dan Holler, Communications Director for Heritage Action for America- T OPIC: 5 Observations on how the campaign map has changed politically 5 days out from the election.
6:20-6:25- Dan Holler continued.
6:40-6:45- Kevin Byrne, Ravens Insider- TOPIC: Kevin and Jeff kibbitz about the Ravens' BYE week after the loss to the Texans and the upcoming game in Cleveland.
7:10-7:15- TBA
6:10-6:15- Dan Holler, Communications Director for Heritage Action for America- T OPIC: 5 Observations on how the campaign map has changed politically 5 days out from the election.
6:20-6:25- Dan Holler continued.
6:40-6:45- Kevin Byrne, Ravens Insider- TOPIC: Kevin and Jeff kibbitz about the Ravens' BYE week after the loss to the Texans and the upcoming game in Cleveland.
7:10-7:15- TBA
7:20-7:25- TBA
7:40-7:45- TBA
8:10-8:27- Dr. Walter E. Williams, Economics Professor, Author, Columnist, and Sit-In Host for Rush Limbaugh- TOPIC: The Economy and the message that should have been taught and learned by now regarding it.
8:40-8:51- David Freed, Republican Candidate for Attorney General- TOPIC: The Election, and his thoughts on qualifications for Attorney General.
7:40-7:45- TBA
8:10-8:27- Dr. Walter E. Williams, Economics Professor, Author, Columnist, and Sit-In Host for Rush Limbaugh- TOPIC: The Economy and the message that should have been taught and learned by now regarding it.
8:40-8:51- David Freed, Republican Candidate for Attorney General- TOPIC: The Election, and his thoughts on qualifications for Attorney General.
Gary's Book Corner- The book, "Freedom Manifesto; Why Free Markets Are Moral and Big Government Isn't" by Steve Forbes and Elizabeth Ames is THE MUST-READ of the YEAR! You can also check out www.Freemanifesto.com.
The Truth Behind the Benghazi Attack
The blow-by-blow of the killing of Ambassador Stevens
By Jamie Dettmer , Christopher Dickey , Eli Lake
Special agent David Ubben waits silently, his M-4 assault rifle at the ready as he hides deep in the dark inside the villa that serves as the United States Consulate in Benghazi, Libya. Ubben’s assignment is close protection for U.S. Ambassador J. Christopher Stevens, which isn’t always easy. Stevens, a former Peace Corps volunteer, likes to get out among the people in the countries where he serves, especially Libya, which he helped to liberate from Muammar Gaddafi during the war last year. But even he has started to believe that al Qaeda is gunning for him, and on this day, the 11th anniversary of the Sept. 11 attacks on the United States, Stevens has let himself be persuaded to hold all his meetings behind the nine-foot walls and the coils of concertina wire that surround the Benghazi consulate.
That hasn’t been enough. Now groups of armed men swarm through the compound, firing their AK-47s in staccato bursts, and every so often the air shakes with the concussion of a grenade. Behind Ubben, in a specially fortified suite called a safe haven, the ambassador and another diplomat, Sean Smith, should be well protected. There is a large closet, similar to a “panic room,” with supplies of water and food to withstand a siege of hours or even days, and Ubben has radioed the four other American security men holed up in other consulate buildings that he and the ambassador and Smith are OK. This is what the safe haven and the safe room have been built for. And he is there with his M-4 at the ready. He will make sure nobody gets through the steel grilles that protect them.
But now, watching from the dark, Ubben sees some of the attackers coming into the other, open side of the villa. They are carrying jerrycans full of diesel used to fuel the embassy’s electrical generators. They peer through the locked grate of the safe haven. They rattle it. They don’t seem to see him. Ubben watches. He waits. They are spreading diesel over the floor, pouring it onto the overstuffed Arab-style furniture. The fire begins. The flames start to spread. The fumes—the fumes are everywhere. And there is nothing Ubben can do to stop them.
In Washington that morning of Sept. 11, 2012, the air had been crisp and clear and so much like the crisp, clear morning of 11 years before that President Obama mentioned the similarities at a 9/11 memorial service outside the Pentagon. But much else had changed, he said. “Al Qaeda’s leadership has been devastated and Osama bin Laden will never threaten us again,” he told the small audience of employees, their dark glasses glistening in the bright sun. “No single event can ever destroy who we are,” Obama concluded. “No act of terrorism can ever change what we stand for.”
But over the course of the next 24 hours, as the black banner of jihad flew over the United States Embassy in Cairo, and as the American Consulate and the nearby outpost of the CIA in Benghazi came under ferocious attack, all the assumptions on which the administration had founded its counterterrorism policies were called into question. And in the weeks since, the events of that day have come under enormous scrutiny in the close-fought race for the presidency.
The State Department, monitoring the phone calls from the consulate’s operations center, knew virtually from the first minutes, as Ubben, Stevens, and Smith were hiding, that the attack on the consulate was no protest gone astray. And when a major CIA outpost nearby came under attack hours later, there was little doubt about that being an operation by well-trained terrorists. But the administration has sought to reveal as little as possible about the CIA presence and operations in Benghazi, not least because when Obama talks about bringing the killers to justice, those are the people who may be asked to do it.
What follows is a reconstruction of what happened on Sept. 11, 2012, including the first eyewitness account of that critical predawn battle at the secret CIA facility in Benghazi, where two former U.S. Navy SEALs were killed. It is a chronicle of the hunters becoming the hunted in a shadow land of jihadists and revolutionaries, and it shows that even with bin Laden gone, the fight against terrorists is far from over.
By last summer, it had become obvious to U.S. diplomats and intelligence officers that the core al Qaeda organization was trying to take advantage of Gaddafi’s fall and the security vacuum that followed. The connections were many. In 2006 and 2007, one in five of the hundreds of foreign fighters who joined al Qaeda in Iraq came from eastern Libya. And the Americans were tracking the senior leaders wherever they could find them. Their biggest score was Abu Yahya al-Libi, who rose to be No. 2 in al Qaeda’s core organization after bin Laden was killed, but for just a few months. An American drone blew him up in Pakistan in June this year.
In August, the Federal Research Division of the Library of Congress pulled together a detailed report that argued al Qaeda’s senior leadership in Pakistan was “seeking to build a clandestine network in Libya.” Its operatives were infiltrating the many disparate Salafi Muslim militias, especially a group called Ansar al-Sharia, but they were keeping their profile low. These militias might not follow al Qaeda’s orders, but they sympathized. They took cues. The report also concluded that the increasingly fearsome group al Qaeda in the Islamic Maghreb, which now controls much of Mali, “will likely join hands with the al Qaeda clandestine network in Libya.” And then, on Sept. 10, the day before the attack in Benghazi, al Qaeda released a 42-minute video recording by its current leader, Ayman al-Zawahiri, in which he called on followers to avenge the death of al-Libi.
Whatever America’s other problems with Gaddafi in the old days, according to several veteran CIA operatives, the U.S. had come to rely on him for information about al Qaeda’s Libyan connections. After his overthrow, the United States had to put its own people on the ground to track the bad guys.
The CIA will not comment on the number of people based in the four buildings widely referred to now as “the annex” in Benghazi, but from the crowd of Americans taken to the airport to be evacuated early the morning of Sept. 12, it appears there were at least a dozen assigned to the CIA outpost. Today there is every reason to believe none are left. In that sense, whether al Qaeda’s involvement with the attack was inspirational, peripheral, or direct, this was a battle it won.
The events at the consulate that night have been documented in considerable detail by State Department background briefers. There had been massive anti-American protests in Egypt tied to a provocative film reviling the Prophet Muhammad. Men had scaled the walls of the Cairo embassy unopposed, ripped down Old Glory, and raised the black flag of jihad. But as of 8:30 p.m. in Benghazi, when Ambassador Stevens escorted a Turkish diplomat to the gates of the bucolic six-acre consulate compound, everything was calm. Then at around 9:40, according to the State Department’s records, the sound of gunfire erupted, and an American diplomatic security agent looking at closed-circuit TV screens in the operations center saw armed men swarming through the compound. He hit the alarm and started shouting, “Attack! Attack!” over the loudspeaker.
In Washington, senior State Department officials at headquarters in Foggy Bottom could follow developments minute by minute as the agent in the operations center reported them. The toxic smoke was so thick in the main villa that Ubben, the ambassador, and Smith could barely see. They tried to take refuge in a small bathroom with a window, but there wasn’t enough air. Ubben, barely able to breathe or speak, opened a bedroom window and rolled out onto a little patio protected by sandbags. Tracer bullets whizzed through the air nearby, and every so often he heard deafening explosions. Ubben, an Iraq War veteran, thought he was under fire, but at that point that was not his first concern. The ambassador and Smith hadn’t followed him out. Ubben went back, but he couldn’t find them. He radioed the other agents, half strangling as he talked. They joined the search through the clouds of smoke and toxic fumes. Finally, one found Smith and pulled him out, but he was already dead. They could not find the ambassador.
In the White House, President Obama was meeting with National Security Adviser Thomas Donilon, Defense Secretary Leon Panetta, and Gen. Martin Dempsey, chairman of the joint chiefs of staff, to review the options, but the news they were getting from the fledgling government in Libya was crazily contradictory. The only thing for sure was that the Americans in the consulate were facing a concerted terrorist assault, and the local forces hadn’t been able to make a difference. A Libyan relief force of 40 made it to the consulate but were overwhelmed. A second couldn’t get there because roads were blocked by the attackers, and they came under sniper fire.
In fact, the closest crack combat unit, described by State Department officials as a six-man “quick-reaction security team,” was only about a mile away at the CIA annex. But by the time it arrived accompanied by 16 Libyans, the consulate villa was burning and the ambassador seemed to have disappeared.
The compound was still full of attackers, and the Libyans in the rescue team started to insist that “it’s time to leave. We’ve got to leave.” The five diplomatic-security agents crowded into an armored vehicle with Smith’s body, driving through a hail of bullets impacting the windows and explosives thrown under the tires. At last they made it to the CIA annex.
At the consulate, smoke in the burning villa was thinning out; crowds of curiosity seekers and looters were moving in. As they rummaged through the building, they came across a blond man in a white shirt and gray pants, his nose and mouth blackened by soot and body fluids. They dragged him out through the window at the back of the villa. “The man is alive,” shouted someone in the crowd. “Move out of the way.” Then several other men shouted: “Alive! Alive! God is great.” But when the man was taken to the hospital, the doctors couldn’t revive him. And finally, at 2:30 in the morning, someone identified him positively as Ambassador Stevens.
The survivors of the consulate attack had regrouped at the CIA annex. The quick-reaction team returned, and some skirmishing continued with shooters who had apparently followed the cars. But after a while a relative calm settled over the compound, like the pause near the end of a horror movie when the monster is supposed to be dead, but he’s not.
Hours passed. A handful of American reinforcements landed at Tripoli airport, and a group of about 30 Libyans drawn from different militias joined them. Some of those in the Libyan contingent who talked to Newsweek have given the only firsthand account so far of what happened at the CIA outpost in Benghazi. And while much of the assault on the consulate had been amateurish, depending on lax security, this attack had the mark of real professionals.
“Before we even showed up, they were there waiting,” says a Libyan militia officer who calls himself Ibn Febrayir. At about 4 a.m., as Febrayir and his men prepared to evacuate the Americans from the CIA compound, the street was dead quiet. And then a shot rang out. Then within seconds there was a whooshing sound of rocket-propelled grenades being fired, raining down into the annex compound from attackers in positions concealed on rooftops and behind a stand of trees. In two minutes 15 RPGs hit. Then a pause. Then came the muffled sound of a mortar going off, and a devastating detonation as it hit the roof of one of the annex buildings. “It was a good shot,” says Febrayir. “Whoever fired it knew what they were doing.” It was dark. And they were too accurate. “They must have known the coordinates,” said Febrayir. He and his forces retreated down the road. Inside the annex, the high explosive rounds lobbed on top of the buildings killed two members of the quick-reaction team, Glen Doherty and Tyrone Woods, who had taken up positions defending the compound. Special agent Ubben, who was barely able to move because of the smoke inhalation, also was hit by the blast but survived.
The shooting at the annex went on for about 15 minutes, says one member of Febrayir’s team. And then it stopped as abruptly as it had started. The assailants simply disappeared.
In Washington, President Obama ordered warships to sail toward the Libyan coast and Special Operations forces to be ready for action. At about 5.30 a.m., Febrayir got a call from a Tripoli official warning him that by 6 a.m. “a foreign force” would arrive and everyone near “the farm,” as the Libyans call the annex, would be treated as “hostile.” “You must get out,” the Tripoli official told him. But in the end a motley crowd of militias showed up to escort the survivors to the airport, and even Febrayir wasn’t sure he could trust them.
Just one day after Obama’s speech in front of the Pentagon, he stood in the Rose Garden at the White House. “No acts of terror will ever shake the resolve of this great nation,” he said. “We will not waver in our commitment to see that justice is done for this terrible act. And make no mistake, justice will be done.”
The U.S. Tax System: Who Really Pays?
Stephen Moore, Senior Economics Writer, Wall Street Journal Editorial Board
“It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates…. [A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.” —John F. Kennedy, 1963[1]
Even if most policymakers and members of the public instinctively understand the wisdom of President Kennedy’s words, tax rates are set to go way up, not down, next year because of the scheduled expiration of the Bush tax cuts at the beginning of 2013. The Obamacare law also raises tax rates on wealthy individuals by an additional 3.8 percentage points next year. President Obama and others in Congress argue that these higher tax rates are justified because of the growing consensus that the rich don’t pay their fair share of taxes. Unless we do something to spread the burden more equitably, the argument goes, American society will become more unfair and the economy more unsustainable with each passing year.
At first glance, the tax rate issue seems inseparable from the tax fairness issue, since higher taxes are expected to shift society’s wealth from the private sector to the public sector, where, broadly speaking, it is redistributed to lower-wage earners and the needy. In reality, the people at the bottom of the scale have benefited directly and indirectly from every tax rate reduction dating back to Kennedy’s rate reductions in the early 1960s and through the tax cuts adopted early in the administration of George W. Bush. If those lower rates, along with the Alternative Minimum Tax fix, are allowed to expire, the poor will be burdened even more than the wealthy because the whole economic pie will shrink.
If tax cuts work to expand the economy, the income pie gets larger for everyone. For example, tax rate reductions on businesses may mean more money after-tax for hiring more workers, paying them more, or purchasing more plant and equipment and computers that make workers more productive and efficient. Tax rate reductions on investment expand investment and mean more funds available for new businesses to get off the ground and for existing businesses to expand. Lower estate taxes may mean that family-owned businesses don’t have to be sold at auction at the time of the owner’s death. Everyone benefits.
At stake in the current tax debate in Washington are not only marginal income-tax rates but the tax on capital gains and dividends. Federal taxes are already scheduled to rise by about $700 billion over the next ten years to finance the Patient Protection and Affordable Care Act. In short, Americans face the largest cumulative tax increase since the end of World War II, which could be a mighty blow to an economy already on the verge of double-dip recession.
The truth is that higher taxes starve the very sectors of the economy that create jobs for everyone. They can, for a little while, reduce the incomes of our top-earning citizens—until these people’s top-notch accountants are able to redirect their investments away from the most efficient, effective uses of their money and into sleepier investments such as government debt, instead of providing the capital that some high-tech company, for example, needs to develop its next tablet.
Below are a series of statements reflecting popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness. We’ll address these statements (and debunk attendant myths) one at a time.
1. To become fairer, the tax code needs to tax the rich more heavily.
President Obama certainly thinks so. His latest budget proposal raises $1,700 billion in taxes over the next decade by increasing tax rates for the wealthiest Americans as well as for the middle class. He wants a top tax rate of almost 42 percent[2] (up from 35 percent today) on anyone with more than $250,000 in income from salaries, small-business income, and dividends. After paying state and local taxes, some Americans will face tax rates of nearly 50 percent—because for businesspeople and other active participants in the economy, many other types of tax are applied to almost every stage of transactions. As a result, much of those people’s wealth, which might otherwise go toward creating jobs, would end up sitting in unproductive tax shelters.
For this and other reasons, high tax rates are the worst way to redistribute income to the poor and the middle class. In 1972, when the highest tax rate on the rich was 70 percent and the top capital-gains tax rate was 35 percent, the richest 1 percent of Americans assumed 18 percent of the income-tax burden. Today, with a top income-tax rate of 35 percent and a capital-gains rate of 15 percent, their share is 39 percent, more than twice as much. This is true because, faced with high tax rates, the rich of 40 years ago put more of their income into tax shelters or foreign countries. They invested less, and they worked less. And the rest of us suffered during the years of stagflation—as we will again, if rates are raised.
Even though taxes are 10 to 20 percent lower in the United States than they are in most other industrialized nations, the U.S. government is more dependent on rich people for taxes than are many of the more socialized economies of Europe. According to the Tax Foundation, the U.S. gets 45 percent of its total federal taxes from the top 10 percent of tax filers, whereas the average for industrialized nations is 32 percent. America’s well-off bear a larger share of the tax burden than do the rich in Belgium (25 percent), Germany (31 percent), France (28 percent), and Sweden (27 percent).
2. The rich are paying less in income taxes than they have in the past 50 years.
False. In 2007, the richest 3 percent of Americans contributed a larger share of tax revenues than they have in any year since 1960. For more than half its income, the federal government relies on what it takes from just that 3 percent.
Every year, the Treasury Department examines the distribution of federal taxes by income group. The data for all recent years yield the same conclusion: people at the top not only make a disproportionate contribution to the nation’s wealth; they also pay a higher proportion of their collective income than those at the bottom. Let us examine the data for 2007, when the richest 1 percent of Americans made 22 percent of all earned national personal income but contributed 40 percent of all personal income-tax revenue. The top 10 percent contributed 71 percent of all personal income-tax revenue. The bottom 50 percent earned 12 percent but contributed just 3 percent of the tax revenues so obtained.
3. When all the other taxes are counted, the rich get off easy.
It’s true that the Social Security tax is somewhat “regressive,” in comparison with the income tax. But the payroll tax makes much less difference than people might think. Payroll taxes of just under 15 percent (combined total of employee’s and employer’s share) are charged on the first dollar of income earned by a worker, and the tax is capped at an income of about $110,100 in 2012. The Tax Policy Center, which is run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by every income group. It found that the highest-income 1 percent of Americans still pay a combined (income plus payroll) average rate of 26.[1] percent, while the poorest fifth of Americans receive a refund of 0.9 percent, largely through the Earned Income Tax Credit. As Figure 3 illustrates, even when the regressive effects of the payroll tax are counted, the rich contribute a greater fraction of their income, and make a greater contribution to federal tax revenues, than other income groups.
4. Tax cuts are just Robin Hood in reverse, taking from the poor to give to the rich.
Since we have just shown that the rich pay more in taxes than the poor, it might appear that tax cuts disproportionately benefit the rich. But the economy is not a static, limited resource in which winners gain at the expense of everyone else. Tax rates can change the size of the pie, since they affect how people act in the economy.
Imagine that a 90 percent or even 100 percent tax on income over $100,000 were imposed. What would that mean for the economy? A lot of people would stop going to work, or seeking promotions, or working second jobs, or running their businesses. And who would want to start or expand a business under such a punitive tax regime? The higher the tax rate, the lower the incentive to lift a finger, propose new ideas, or create a single new job.
Low rates might be beneficial for the private sector, but we cannot pretend that we don’t have a government or that it doesn’t need funding. So in balancing the interests of the private sector and the claims of government, we need to focus on yield—how to raise the necessary revenue to fund government without shrinking the private economy. We must discover the optimal tax rate, which is the lowest possible rate that will produce sufficient revenues to pay for government’s services.
How can we tell when taxes are too high? The most common side effect of excessive tax rates is an economic downturn or, in the worst case, a recession, such as we suffered repeatedly through the 1970s. The near-doubling of tax rates on the rich in the 1930s under Herbert Hoover and Franklin Roosevelt played an important role in extending the length of, and the suffering from, the Great Depression. In recessions, the rich do a little less well, but the poor suffer terribly. Recoveries, like the 25-year boom launched by Ronald Reagan’s tax cuts, lift all boats—especially those of the people most vulnerable to economic ups and downs.
5. Lower tax rates can make the tax burden fairer.
True. In the early 1960s, the highest income-tax rate was 91 percent. That rate was slashed to 70 percent during the Kennedy administration and remained there until 1981. President Reagan slashed the top tax rate to 50 percent, then to 28 percent in 1986. Even though the tax rate fell by more than half, total tax receipts in the 1980s increased, from $517 billion in 1981 to $1,030 billion in 1990, reflecting strong growth of the economy. In view of the results, taxes also appear to have become fairer: since the late 1970s, even as tax rates fell by half, the amount of taxes paid by the wealthy, and their percentage of total income taxes paid, increased vastly.
This trend continued into George W. Bush’s presidency: by 2007, the top 5 percent paid a larger share of individual federal taxes than the bottom 95 percent—for the first time since the Great Depression.
Along with fairness came opportunity, growth, and jobs because the money freed up for consumption and investment had a multiplier effect. Lower tax rates affect every economic decision. Just as consumers might forgo a vacation if they do not expect a tax refund, investors will take fewer risks if they expect their profits to be taxed away. Indeed, lower tax rates encourage investing in America (rather than China), where investors and entrepreneurs will start or expand businesses and create jobs. High taxes, by contrast, nudge people toward safe, sleepy investments or offshore tax shelters.
When President Kennedy was promoting tax rate reductions in 1963, he stated that the best way to promote economic growth “is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system—and this administration is pledged to an across-the-board reduction in personal and corporate income tax rates.”[3]
Even though the truth of Kennedy’s words has been confirmed, this country now faces the absurd prospect of a huge, automatic rise in tax rates in January 2013, when the Bush tax cuts expire. Many Democrats want to raise taxes for those earning more than $250,000—the bulk of America’s investors and entrepreneurs—while most Republicans want to keep all the lower tax rates in place. The Bush tax cuts passed Congress in May 2003. The major changes were as follows:
The tax on dividends was cut from 39.6 percent to 15 percent.
The tax on long-term capital gains was cut from 20 percent to 15 percent.
The highest marginal personal-income tax bracket fell from 39.6 percent to 35 percent. The lowest tax bracket fell from 15 percent to 10 percent.
The tax on business investment in plant, machinery, and equipment was lowered.
Of course, wealthier Americans saved more in taxes than poorer Americans, since they had more money at stake. But the non-wealthy benefited significantly—and not just in their take-home pay. They saw more hiring by businesses, a stronger stock market, and other favorable reactions to the lower tax rates in 2003–07. At the same time, tax revenues rose more after the Bush tax cuts than they did after the Clinton tax increases. And the economy grew faster.
Moreover, after the 2003 tax cuts, payments by the rich increased faster than anyone else’s. Total taxes paid by households earning $1 million or more in a given year more than doubled in 2003–07, even as the tax rate was lowered.
Figure 7 shows what happened to the number of Americans who declared more than $1 million in income on their tax returns through 2007. In just three years, the number earning at least $1 million more than doubled. The best way to get more money from taxpayers is to create more rich people.
Not only did the dollar payments of the rich rise, but the percentage of the total tax burden that the rich paid also increased. The rich are now paying more than they would have paid had the Bush tax cuts not gone through.
The rich also paid a larger share of total personal income taxes paid following the 2003 tax cuts, partly because those tax cuts provided a big cut in middle-class taxes and took a big percentage of Americans off the tax rolls completely.
All these wealth-creating policies would be reversed if the 2003 cuts are allowed to expire in January 2013. Not only would those with high incomes be affected: the Alternative Minimum Tax would return, and because it has not been indexed to account for income inflation, it would affect 30.1 million Americans, swelling the tax bills of people making less than $100,000 a year by $2,000–$3,000.
Here is what will happen if nothing is done about extending the Bush era tax cuts and abolishing Obamacare taxes:
If those tax rates go up, many economists believe that it will push the stock market lower, contract the real economy, and possibly contribute to a double-dip recession like the one that Americans suffered under President Jimmy Carter. Our current recovery is too fragile—we are still 4 million jobs short of where we were in 2007—to withstand such a blow. Except in the face of a conflict like World War II, it’s almost never a good idea to raise taxes, but it’s especially foolish when the economy is still struggling.
6. All those tax cuts created deficits that have mortgaged our children’s future.
False. The lower tax rates brought in more money because they helped the economy to grow and created more jobs and more wealth. Reagan’s tax cuts caused federal tax receipts almost to double, from $517 billion to $1,032 billion. As The New York Times stated on December 8, 1992: “One popular misconception is that the Republican tax cuts caused the crippling federal budget deficit now approaching $300 billion a year. The fact is, the large deficit resulted because the government vastly expanded what it spent each year.”[5]
A growth spurt similar to the one following Reagan’s tax cuts came in response to Bush’s. The Congressional Budget Office (CBO) reports that in the first four years of the Bush tax cuts, federal revenues increased by $786 billion—the largest real increase in history. From 1981 to 2007, every time tax rates were reduced, tax payments by the rich climbed:
At a top rate of 70 percent in 1980, the top 1 percent paid $47 billion in federal taxes. Today, at a 35 percent rate, they paid more than $400 billion. Even adjusting for inflation, that is a nearly 300 percent increase in tax payments by the rich.
After the Reagan income-tax cuts in 1981, the highest-earning 1 percent more than doubled their collective income-tax payments, from $50 billion in 1981 to $114 billion in 1988.
After the 1986 tax reform act, income-tax payments by the rich rose from $70 billion to $146 billion in 1993.
After the 2003 tax cuts, payments by the rich increased from $256 billion in 2003 to $451 billion in 2007. Some of those revenue gains were inflated by the housing bubble, but there was certainly no revenue loss.
What matters most in collecting the taxes needed to run the government is how fast the economy grows and how many jobs are created. Raising tax rates on the prosperous—especially small-business owners, who would be exposed to higher taxes if the 2003 tax cuts expire—can be counted on to shrink the economy and stifle job creation.
All this talk about tax increases is really a political diversion from the real problem in Washington: overspending. The federal budget is now $3.8 trillion, compared with roughly $2 trillion in 2000. Reagan used to cast aside calls for higher taxes with a simple retort: “Never give a big spender a bigger allowance.” The spending disease is what really threatens to paralyze our economic future.
7. Ordinary Americans pay more than their fair share of taxes.
Every year, fewer Americans pay any income tax at all. The nonpartisan Tax Foundation found that in 2009, nearly 42 percent of Americans who file tax returns end up paying no tax. In 2008, that percentage was around 36 percent.[6] Many of these Americans actually received a check from the IRS because of the tax credits that they claimed.
8. The 15 percent tax on investment income, which is well below the income-tax rate that most salaried workers pay, is a gift to the wealthy.
If it is, it’s one that a majority of Americans benefit from. The latest polls show that 54 percent of Americans own stock and benefit directly from lower capital-gains and dividend taxes. But that is probably the smaller part of how ordinary taxpayers benefit. Capital gains are what is left over when an investment—in a stock whose price could have tanked, or a new business that could have gone bankrupt—succeeds. Investing is therefore different from drawing a paycheck, which is almost certain to clear. It makes sense to reward productive risk-taking with a lower tax rate.
Lower capital-gains rates also increase the amount of taxes paid. The 1997 capital-gains tax cut reduced the long-term rate from 28 percent to 20 percent. In the subsequent three years, the amount of taxable capital gains almost doubled. When President George W. Bush cut the rate again, to 15 percent, a 107 percent increase in revenues from 2002 (the year before the rate was reduced) to 2005 resulted.
One explanation is the effect of taxes on decision making. When tax rates are high, people postpone selling stock that they own and thus claiming a profit, even if it would be more rational, from a strictly economic standpoint, to do so right away. In short, the tax code, and not good business sense, is making economic decisions for them. By keeping investors from reallocating their capital to its highest, best use, high taxes promote economic inefficiency and damage productivity. They also shrink the volume of gains that can be taxed.
As John F. Kennedy said in 1962: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital …[,] the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”[7]
9. A higher capital-gains rate would just level the playing field.
It’s true that many very rich people get their income from capital gains and dividends, which are taxed at a lower rate, but that lower rate is deceptive because it is a tax on top of the tax that corporations pay before they pay any of their profits to shareholders. In the U.S., the rate that corporations pay on their profits can be as high as 39.2 percent when including state taxes. (The compensation that they pay their employees is a tax-deductible business expense.) The real tax rate on corporate income paid to individuals through capital gains and dividends is not 15 percent but closer to 40 percent. A higher capital-gains rate would just compound the injustice. In 2007, middle-class families earning between $34,000 and $50,000 paid an effective 14.3 percent of their income to the federal government, according to the CBO. In 2007 (the most recent year for which data are available), those earning more than $2 million paid an average of 24.9 percent. That 15 percent rate cannot be said to tilt the tax system in rich people’s favor.
10. The "wealthy" are likely to be the people next door.
In a country of more than 300 million people, the number of fabulously rich people—the top entertainers, athletes, hedge-fund managers—is tiny. Most of the people in the top income-tax category are small-business owners and investors. Most small businesses are S corporations, meaning that they are taxed at their owner’s individual-income rates, according to the Senate Finance Committee. Thus, when tax rates go up on the rich, they go up on small businesses.
How the wealthy are doing, as well as how numerous they are, has a big effect on the revenues that the government can collect. Because the economy has done so poorly in recent years, tax payments by a dwindling number of the rich have plummeted. According to IRS data, 390,000 tax filers reported adjusted gross income of $1 million or more for 2007. These people paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39 percent, and the total taxes they paid declined to $178 billion, a drop of 42 percent.
Those with $10 million or more in reported income fell to 8,274, from 18,394 in 2007, a 55 percent drop. As a result, their tax payments plummeted by 51 percent.
These disappearing millionaires go a long way toward explaining why federal tax revenues have sunk to 15 percent of GDP in recent years. The loss of millionaires accounts for at least $130 billion of the increased federal budget deficit in 2009.
Today’s “tax fairness” activists are concerned mainly about income inequality. But raising taxes contributes to downturns and recessions, which may, unfortunately, be the only way to increase equality. And recessions fall inordinately on the less well-off. Are financial losses for all levels of income an acceptable price to pay for greater equality of income? The recession and weak recovery of the past four years have been income levelers. In 2007, those who made more than $200,000 earned about 35.2 percent of our nation’s total income; in 2009, that figure went down to 33 percent. In 2007, those with incomes above $1 million earned 17.3 percent of the nation’s income; by 2009, that figure was down to 12.9 percent. So we have created a more equal society—by making America poorer.
11. It is increasingly harder to climb the economic ladder, and changing the tax code will help.
Barack Obama seems to think so. Since the early 1980s, he says, the rungs of the economic ladder have been sawed off, making the upward climb increasingly futile. He also alleges that a child born into poverty in the years immediately after World War II had a better than 50–50 chance of moving into the middle class; and a child born into poverty in 1980 had a 40 percent chance of moving up; but a child born today will have only a 33 percent chance of “making it to the middle class.” The New York Times reports that other nations have much more income mobility from one generation to the next than does the United States. It cites research that finds that most Western European and English-speaking nations have higher rates of mobility. The Times reports that in the U.S., 42 percent of those born into the bottom fifth of income stay there as adults. In many other industrial nations, only about 33 percent or 25 percent born into the bottom quintile are found there as adults.[8] Are these gloomy portrayals true? Not exactly.
The story on income mobility across generations in the U.S. is admittedly mixed. The questions are whether a person born poor is likely to be poor when reaching adulthood and whether children who grow up in rich households are much more likely to be rich as adults. In other words, how much does it matter who your parents are, in terms of your own success? We would like to think that what matters most is individual initiative and hard work, not one’s genes or one’s head start in life.
One thing we do know for certain is that today’s workers are generally a lot wealthier than their parents were at the same age. A study by Ron Haskins, based on Pew Foundation data, found that about 66 percent Americans have higher incomes than their parents did at the same age. Even more impressive: when adjusting for family size, 81 percent have a higher income than their parents did. So it is not true that our parents were better off than we are.
But there does seem to be considerable controversy and some distressing news about the ability of low-income Americans to climb up from the bottom rungs of the economic ladder. Most studies now find that about 40 percent of low-income children in America have a low income as adults. If one’s probability of being poor were not related to one’s parents’ income, that figure would be close to 20 percent. Even more distressing is that less than 20 percent of Americans who grow up in a poor household move into the high-middle-income or high-income category. It is getting harder for a poor person to rise to the top income level, according to the analysis by The New York Times.
A new analysis by Scott Winship, an economic studies fellow at the Brookings Institution, has looked at the mobility data and is not so negative about the trends. Winship, an expert on economic mobility, points to at least six prominent studies on “intergenerational income mobility.” That is, research that compares the income status of parents with that of their children when they become adults finds “either no change or rising mobility” in recent decades. Winship also examined data from a national longitudinal survey of children born between 1962 and 1964 and children born between 1980 and 1982 and compared these cohorts’ income when they reached the age of 26 to 28 with their parents’ incomes, and found that upward mobility from poverty to the middle class rose from 51 percent to 57 percent over these two periods. He is reluctant to conclude definitively that mobility increased but is emphatic that “the data provides absolutely no evidence that economic mobility declined, whereas the president said it has fallen by 10 percentage points.”[9]
Even more confounding is President Obama’s assertion that only one in three kids born today will move out of poverty. That is not based on any data or any factual measurement but is pure conjecture by researchers. How does anyone know what the income 25 years from now will be of a child born today? More to the point, what is the value of such negative speculation? As Winship puts it, “all the president is doing is reinforcing any doubt among the poor that they can make it if they try.”[10] It is like trying to teach a six-year-old to ride a bike but telling her in advance all the reasons she will probably fall.
But Winship agrees that a more permanent underclass in America is emerging. “In particular, it’s American men who fare worse than their counterparts in other countries.”[11] Men in poor households have a hard time finding their way into higher income classes—but not primarily because of economic factors limiting mobility. Social factors—divorce, out-of-wedlock births, bad neighborhoods, and extremely dysfunctional schools that don’t train children to be highly functioning adults—are responsible. Most experts on the left and right agree that one of the most important steps to reduce income inequality and give every American a fair opportunity to succeed is school choice, so that parents can opt out of failing schools. Welfare reform that continues to promote work over the dole is also critical, as well as policies that promote intact families.
There is little doubt that government can redistribute wealth: taxing high-income individuals can and has increased equality. But there is little evidence to suggest that this results in increased economic mobility for the poor. A 2006 study by Chul-In Lee and Gary Solon finds that intergenerational income mobility has not changed significantly despite various changes in tax rates: “[O]ur results … suggest that intergenerational income mobility in the United States has not changed dramatically over the last two decades.”[12] That study makes it difficult to see how raising taxes on the wealthy will generate increased income mobility for the poor, and it underscores the point that equality is not synonymous with economic mobility.
