Politicians - the Washington gang, including the House, Senate and President - are forever talking about raising or lowering the income tax rate. It's election time. Really, the silly season for floating “what's best for the country income tax rate ideas.” And 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/the estate tax law) one at a time. Maybe we can help these seemingly helpless elected officials get it right.
First, the income tax. The logical reason for tinkering with the income tax rate is simple: raise more revenue. But during the election-silly season, the real reason is, “What will get me the most votes?”
Raising the tax rate will mean more revenue? Right? So claim 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 you some fresh new evidence, and then you decide who is right. My information comes from an article that blew my socks off. The article, You Can't Soak the Rich, by David Ranson, was in the May 20, 2008, issue of The Wall Street Journal.
The article introduces Hauser's Law (HL), originally created by Burt Hauser, an economist who, in 1993, published new and eye-opening data about the federal tax system. Let's start by stating HL: “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of [gross domestic product] GDP.”
The center of the article has a huge chart explaining HL. The chart only has two tell-all lines: the top individual tax bracket from 1950 through 2007 (90% in the 1950s through about 1954; 70% until the mid 1980s; and various rates from a 50% high to low in the 30% range until the mid 1990s with a steady 35% since 2001 until today). This tax-bracket line is all over the map, from 30% to 90%, but what about line two. Revenue as a percentage of GDP? It's almost a straight line, holding at about 19.5%.
The 19.5% tells you the federal income tax yield: tax revenue divided by GDP. Easy enough! You don't have to be a rocket scientist to see what HL means: Raising tax rates lowers GDP.
“Higher taxes reduces the incentive to work, produce, invest and save, thereby dampening overall economic activity and job creation,” says Hauser.
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 let's state the obvious conclusion: a) raising taxes reduces GDP. The result?… lower yield (tax revenues); b) lowering the income tax rate increases GDP, as well as tax revenues. Want more details? Go to The Wall Street Journal's Web site to read the entire article.
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, rising to $3.5 million in 2009. Then absolute stupidity takes over: No tax - nada - in 2010, and finally, in 2011 only the first $1 million is tax free. What are the top estate tax rates? Forty-five percent for 2008 and 2009, zero for 2010 and for 2011 (and thereafter) the insane rate of 55%.
The 2010-no-estate tax law can't survive. It is too risky politically. Neither candidate for president has expressed an interest in killing the estate tax (what Washington should really do, but does not have the courage). Since I know in my heart the estate tax will survive at least the next four-year administration, here's my suggestion to Congress and the new president: Make the freebie $3.5 million, which means a married couple with $7 million of net worth could easily eliminate the estate tax, and lower the top estate tax rate to 35%.
Whatever the president and Congress finally do about the estate tax, the readers of the column know that the author of this column and his network have devised a system that eliminates the estate tax. The system always works, whether you are worth $4 million, $40 million or more. Best of all, the system is easy to implement (no matter how complicated your situation), is always 100% effective and legal.
Finally, here's our advice to the two presidential candidates and members of Congress…Concerning the income tax: Keep your eyes on the real ball - GDP. Stop chasing higher or lower tax rates. Your job is to govern in such a way as to increase GDP. Hauser's Law gives you sure-fire proof that increased income tax revenues always follow. Now for everyone who is reading these words… Your job is to pass this what-seems-to-be-the-secret HL to your congressional representatives and senators.
When you vote for president this November, apply the wisdom of HL to what the candidates say they are going to do about income tax rates.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847/674-5295, email [email protected] or on the Web at www.taxsecretsofthewealthy.com.