Tax-cutters inspired by Jack Kemp have always argued that high tax rates give the rich an incentive to cheat on their taxes. The reality: So do low tax rates.
Jack Kemp, the 1996 Republican vice-presidential nominee, died a week ago Saturday from cancer. Two days later, the Obama White House announced a crackdown on overseas tax evasion havens. These two events had absolutely nothing to do with each other. Their juxtaposition could hardly have been more random. Or ironic.
We ought to pause a moment over that irony. We can learn something from it.
To do that learning, to appreciate last week’s irony, we need to take a walk down memory lane, back to 1977, the year that a young congressman from Buffalo, former football star Jack Kemp, burst onto the national political scene with a daring proposal to slash federal income tax rates — across the board — by nearly 30 percent.
At the time, wealthy Americans faced a 70 percent tax rate on most of their income over $200,300, the equivalent of about $700,000 today. A tax rate this high, the Kemp camp argued, drove the wealthy to chase after tax loopholes. If that rate were significantly lower, the contention went, the rich would no longer have an incentive “to hide income.” Massive tax evasion would disappear.
Kemp wanted the nation’s top tax rate slashed from 70 to 50 percent. He would soon get what he wanted. In 1980, Ronald Reagan campaigned as an avid supporter of Kemp’s tax cut legislation. In 1981, the newly elected President Reagan would bluster the basic Kemp tax cut plan into law.
More tax cuts, over the next two decades, would follow. In 2001, a newly elected George W. Bush would take the top tax rate down at 35 percent, half the 70 percent top rate that Jack Kemp went after in 1977.
And how did the wealthy react to this incredible good fortune? Did they stop hiding income from the IRS and Uncle Sam?
Not exactly. In fact, not for a minute.
In 2001, according to an in-depth IRS study released in 2006, American taxpayers paid $345 billion less in taxes than they legally owed.
Just which Americans did all this tax evading? Last year, IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod broke the IRS “tax gap” data down by income level and found that Americans making between $500,000 and $1 million a year were underreporting their incomes at triple the “misreport” rate of taxpayers making between $30,000 and $50,000.
This past January, after Barack Obama took office, the IRS director of inspections upped the tax evasion ante. The taxes Americans were evading via cross-border transactions, he suggested, could be adding as much as another $123 billion to the original IRS $345 billion “tax gap” total.
The tax haven crackdown President Obama announced last week directly targets these cross-border transactions.
“Currently,” the White House notes, “wealthy Americans can evade paying taxes by hiding their money in offshore accounts with little fear that either the financial institution or the country that houses their money will report them to the IRS.”
Among the steps the White House is proposing to end this evasion wave: the hiring of 800 new IRS agents “devoted to international enforcement.”
The overall “tax cheat” package that the White House is proposing, points out the Tax Justice Network, a global group of tax and finance experts, actually doesn’t go as far as the Stop Tax Haven Abuse Act that Barack Obama, as a senator, co-sponsored in 2007. But that hasn’t stopped business groups from attacking the administration crackdown in exceedingly strident terms.
The National Association of Manufacturers has dubbed the White House proposals “disastrous,” and the Business Roundtable, a group that represents top corporate CEOs, has charged that Obama’s moves would “ripple growth, reduce the competitiveness of U.S. companies overseas, and destroy jobs.”
Jack Kemp couldn’t have said it any more feverishly. Three decades ago, at the start of his drive to lower tax rates on America’s richest, he argued that the tax code then in effect “punishes savings, investment, work, and production.” Kemp has now left us. His spirit clearly lives on.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.