But Hardly Anyone Pays it

Since World War II the standard reply to anyone proposing to cut a particularly high tax has been “but hardly anybody pays it.” John F. Kennedy looking at the then top rate of 91% was told not to worry about such a high rate because nobody paid it. The people pointing this out were absolutely correct. As Arthur Laffer showed with his “Curve” A graph running from 0 to 100% tax rate will raise no revenue at either extreme. Clearly 0 tax raises 0 revenue but people will do virtually anything rather than just giving all their hard-earned income to the government at 100%.  It made sense then at hide it, legally or not, or maybe only work to the level of a reasonable tax rate and no more. At 91% then it made perfect sense to write off all “expenses”  you could. Business people found ways to have their companies pay for everything from autos to country club memberships. After all the $1,000 of marginal income at the top rate meant you kept only $90. The investment industry found investments with 90-100% write-offs in the first two years.  These were structured so the investment would have a 0 cost basis and when eventually sold would pay only the capital gains tax then at 25%. Limited partnerships for high write-off endeavors such as Oil Drilling, Angus  Bull breeding and planting Pecan trees flourished.  After all, even if the investment was a loser and returned only $2 out every three invested you still came out. Out of your $1000 invested you only got back $675 on which you paid 25% capital gains tax netting $506.25.  A crummy investment to be sure but remember if you paid the tax rather than investing  you would’ve retained only $90.  Looked at from this prospective the investment returned more than 5 times as much. Even at lesser but still high brackets these kind of numbers led to capital moved diverted into mediocre or worse investments. Is this what any reasonable person want for this $1000? The high tax raised little or no revenue but caused vast sums to be into poured into poor or unproductive investments.  JFk and Reagan realized the waste entailed in avoiding confiscatory taxes caused a loss to the economy and worked to lower rates.

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