Late last week, I was thrilled to have the opportunity to interview Thomas Sowell about his new essay, Trickle Down Theory and Tax Cuts for the Rich. Here’s the slightly edited transcript of our conversation.
This is probably a very basic question for you, one you cover with your Economics 101 students, but it’s one that I think a lot of people in politics need to hear. As a general rule, why are low tax rates on everyone, including the wealthy, preferable to high tax rates?
For a number of reasons, but I think one of the most important reasons, especially for those in the upper income bracket, is that you can collect the low tax rates and you have great trouble collecting the high tax rates. Because if you were really one of those “millionaires” and “billionaires” that Barack Obama talks about, you probably have a vast amount of money in liquid form that you can send over to any country in the world with the click of the computer mouse. And so as the tax rate goes up, more money goes out to other places. Along with that money go jobs that those investments create.
One thing you note in the essay that would probably surprise a lot of Democrats is that among other people, John Maynard Keynes, Woodrow Wilson, and John F. Kennedy have all argued in favor of cutting tax rates to increase economic growth. Tell people a little bit more about that.
Well, they discovered when they first had income taxes back during the time of the First World War that as you raise the tax rates, more and more people no longer pay them because they put their money in tax exempt securities primarily. And so the, the amount of money in tax exempt securities rose at one point to where it was more than half the size of the national debt and several times the size of the federal government’s annual budget –so huge amounts of money went into hiding. And so even though the tax rate that rose at one point to 73 percent, 73 percent of nothing doesn’t bring in any revenue to the government.
Related question to that: Another thing that a lot of people don’t seem to get is that higher tax rates on the rich don’t necessarily mean higher revenue and it doesn’t even mean that the rich will necessarily end up paying a higher share of the taxes. Here’s an excerpt from the book, from the essay.
“The facts are unmistakably plain for those who bother to check the facts. In 1921 when the tax rate on the people making over $100,000 a year was 73 percent, the federal government collected a little over 700 million in income taxes of which 30 percent was paid by those making over $100,000. In 1929 after a series of tax rate reductions had cut the tax rate to 24 percent on those making over $100,000 the federal government collected more than $1 billion in income taxes of which 65 percent was collected from those making over $100,000.
Explain to people how that can be.
Well if you’re in one of those top brackets and the rates go up to very high levels, then it pays you to accept a low rate of return from say tax free municipal bonds even though a higher rate of return is available in the market. That’s because the market rate, the government is going to take 73 percent of it. So you’re going to end up with less than if you purchased municipal bonds. Once the tax rate gets down to 24 percent, then you’re better off taking your money out of the municipal bonds, putting it in the marketplace where you can get a higher rate of return and even though the government taxes are there (because) you’re better off on that balance. More important though, the economy is better off because instead of financing boondoggles by local municipal governments, you’ll be financing the building of railroads, factories, and other kinds of capital that raise the national income and output.
Now, we have the world’s highest corporate tax rate and many of the same trickle down arguments are used about that just as they are about cutting taxes on the rich. As a practical matter, what do you think the impact of having a tax rate that high is?
I think you can see it in the statistics that show Americans are sending more money to other countries than other countries are sending to America. That net export of American wealth means the other countries are creating jobs in other countries while large numbers of Americans are unemployed.
Last question, let’s say that we took a page from the French and passed a flat 75 percent tax on every dollar made by people who make more than $250,000 a year. Let’s say, you make $1 million by any method, you get to keep $250,000 all the way up. How do you think that would impact the behavior of wealthy Americans and what do you think the impact overall in America would be?
My gosh, you would cause all kinds of money to go to the Cayman Islands, to Bermuda, Switzerland, China, you name it. All that capital would be creating jobs in other countries while more and more Americans would find it harder and harder to get work.
Once again, you can read Thomas Sowell’s new essay here.
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