Supporting tax hikes on the rich could backfire on voters

The 2016 election has brought with it a whole new level of polarization over income.

Many liberal politicians argue the United States has entered into a new Gilded Age, where the poor have nothing and the rich have it all.

Left-wing activists argue that as a result of Ronald Reagan’s “trickle down” economic policies, income inequality has skyrocketed far above where it needs to be.

Raymond Batina, a Professor of Economics at WSU, helped put the issue into focus through the lens of economics.

Batina explained that the theory of “trickle down” is known to economists as supply-side economics.

The theory, Batina said, argues that the U.S. tax rate is so high that it doesn’t incentivize working at higher levels of income. So, if you cut taxes, revenues could stay the same or increase.

“First, you cut the tax rate,” Batina said. “Take-home pay goes up, investment goes up, saving increases, resources increase, tax revenues increase.”

Even if in the short term there was a deficit, in the long run you could pay it off with the new revenues.

There’s only one problem: it didn’t exactly work out that way.

Both Presidents George W. Bush and Ronald Reagan tried Arthur Laffer’s theory, and found themselves with increasing deficits and debt, Batina explained.

“The tax base didn’t grow enough,” Batina said.

But how does this fit in with income inequality?

The Great Depression wiped out much of the savings of the wealthy, with the top 20 percent’s share of income dropping dramatically.

During and after World War II, top tax rates were higher than 90 percent. There was no incentive to increase your income at that level, and so the top 20 percent’s share of income stayed pretty much constant.

President John F. Kennedy lowered the top tax rate to around 70 percent, Batina said.

Ronald Reagan, under the advisement of Arthur Laffer and others, decided to dramatically cut taxes.

“(Reagan’s) tax cut was the biggest tax cut in human history,” Batina explained. “The top tax rate went down to around 40 percent.”

The incentive not to increase the incomes of the top 20 percent disappeared, and with it came a rising tide of income inequality.

Or so it seems.

According to the US Department of the Treasury, if you measure the humans of the top 1 percent, from 1996 to 2005, their incomes actually fell.

Why would there be a disparity in the numbers?

The simple answer: one uses measurement of brackets, the other uses measurement of humans.

Stanford economist Thomas Sowell, in his book “Basic Economics,” explained that 95 percent of individuals in the bottom 20 percent will find themselves rising out of that bracket at some point in their lives.

In a lecture at Stanford’s Hoover Institution on June 15, 2015, Sowell elaborated that 56 percent of Americans will find themselves in the top 10 percent of the income distribution by the time they die.

Another fact raised by Sowell in that same lecture was that the majority of top one percent of income earners only remains in the top one percent for one year.

Bearing that in mind, understand that when Washington, D.C. politicians argue that the rich have everything and the poor have nothing, today you may be part of the poor who have nothing, but in the future you could be part of the rich who have everything.

When politicians debate raising taxes on the wealthy, they may very well be calling to raise the taxes on your future income.

Recall discussion of incentives to hold wealth – when there was a 90 percent tax rate, there was no incentive to have a high income, because you’d only get to keep 10 percent of it.

Now, with a tax rate just under 40 percent – though effectively closer to 20 percent – there is incentive to earn a higher income, which is one reason incomes are rising.

That means you in the future – the richer, more experienced version of you – can earn a higher income.

So, by choosing to support a candidate who will punitively tax the rich, you may just be taking away income from yourself in the future.

Harrison Conner is a junior economics major from Stanwood. He can be contacted at 335-2290 or by [email protected] The opinions expressed in this column are not necessarily those of the staff of The Daily Evergreen or those of The Office of Student Media.