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At this moment the Congress is considering the Clinton economic package. The proposal includes a hike in marginal tax rates on high income families to increase national investment and create more and better-paying jobs. If the Congress adopts the plan, it will fail.
Nowhere in the debate are we hearing that the greatest savers and investors in the nation are the very people the president is targeting for heavier tax hits. In the face of these higher levies, they will simply reduce their saving, not their consumption.
One does not have to be an economist to understand that when you tax something, you get less of it--be it saving, investment, income or work effort. The President's economists forgot that individuals in the upper income brackets save a much larger portion of their total income each year than those in the middle or lower income brackets.
According to the latest Federal Reserve data, families with incomes at or above $50,000 hold an average of $41,500 in financial assets--quadruple the level held by the average American family. The average family with before-tax income of $80,000 saves 67.6 percent of the family's post-tax income annually, versus only 11.1 percent for families at the national average of $34,000 in pretax income. Most significantly, out of each new dollar of income, those taxpayers in the $200,000 income category are likely to save 90 percent--what economists call the "marginal propensity to save."
Under the President's proposals, the 1.2 percent of Americans earning more than $180,000 per year will see their marginal tax rates rise to 36 percent from 31 percent. And, there will be an added 10 percent surtax on incomes over $250,000 a year.
Washington will be taxing upper income families an additional $31 billion in the first year. Using the marginal propensity to save derived from various consumer expenditure studies, we conclude that probably 80 percent, or $25 billion, would have been productively saved and invested.
By the administration's own estimates, the tax take from higher personal income tax rates over the next six years will be $126.3 billion. We estimate that at least $100 billion will come out of saving and investment. Furthermore, by lifting the corporate income tax rates to 36 percent from 34 percent, Washington hopes to derive another $30.6 billion in revenue.
But the average U. S. firm reinvests two-thirds of its total profits and pays out dividends to pension funds and private investors who tend to save and reinvest more than the average person--and certainly more than a profligate Congress and administration. The net reduction in investment will be at least $120 billion over six years.
With U.S. saving rates (personal savings as a percent of personal income) not only one of the lowest in the developed world and getting worse, one might think the President would want to change Washington's anti-savings policies and its chronic addiction to $200-$300 billion deficits.
Despite his somewhat toned down "rich versus poor" rhetoric, it is still disconcerting to hear the President of the United States taunt one class against another, saying, "middle-class Americans should know: you're not going it alone any more." The fact is that between 1981 and 1988, the top one percent of income earners in the U.S. watched their share of total taxes paid to Washington climb from 17.9 to 27.6 percent. The top 5 percent of taxpayers saw their "fair" share grow from 35.4 to 45.6 percent. The latest proposals, if enacted, could raise these shares of personal income taxes paid by the top one and two percent of taxpayers to 30 and 50 percent, respectively.
Soak the rich and spend the wealth amounts to a scheme that works against the poor and those most in need of jobs. Each job in the private sector now requires a capital investment of at least $52,000. For jobs in retail and personal services, the sum is less than $20,000. The investment threshold in the motor vehicle industry is $46,256. For jobs in manufacturing in general, the needed capital requirement is $47,684, and new high-tech jobs often require two to four times that. Using the average capital investment required for job creation in the U.S. economy, the Clinton tax plan--in reducing private sector investment by $120 billion--will abort at least 2.3 million private sector jobs over the next six years!
The Clinton plan is based on the well-known redistributionist principle of "From those according to their private sector productivity to those according to their public sector influence." Expropriating savings from families and profits from business in the private sector and giving Washington's bureaucracy more economic power has the ultimate effect of reducing total U.S. productivity.
Furthermore, if the new taxes were to come mostly from consumption, that would harm employment the least; unfortunately, the administration's taxes are to come heavily from investment, which will do maximum harm to employment.
Make no mistake about it. The administration's rhetoric to the contrary, taxes are not "contributions," government spending is not equivalent to private "investment," and taxing the savings of those who invest is not a prescription for job creation.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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