Taxes and America's Flight Capital
NEVER mind George Bush's lips. Our leaders in Washington had better start reading their constituents' lips. The message voters will be sending both parties heading into 1992: ``Read our lips: Deliver better government for less.'' ``Soaking the rich,'' or anyone else, will no longer work very effectively because governments have lost a measure of their power to order more revenues to cover their profligate expenditures (which for 1991 includes, among other extravagances, a 16 percent increase in the spending on congressional offices, and a half million dollars to renovate Lawrence Welk's birthplace).
The tax rates any government can charge are now being determined as much by international economic forces as by domestic political forces. The world of the 1990s is one big integrated capital market, with investment funds ready to move at the speed of light and at the cost of a phone call to countries with the most hospitable tax climates.
Researchers at the Treasury Department, the Brookings Institution, and the Organization for Economic Cooperation and Development have found that as many as 55 countries lowered their marginal income tax rates in the 1980s, mainly to stimulate domestic investment, attract capital, and thereby spur economic activity. From my review of these countries' fiscal records, world leaders cut their tax rates (and deregulated industries and privatized government services) not because they wanted to, but because they had to.
Many world leaders from different political persuasions realized that they were operating in a truly competitive world, requiring policies that meet the competition. That world has now been made even more competitive for the 1990s by the economic liberation of the Soviet Union and the countries of Eastern Europe in 1989, all of which want desperately to attract foreign investment from the West.
In the political world of the 1990s, politicians will not have to worry about citizens voting with their ballots so much as with their feet - and with their capital which they can shift around the globe. Governments, including the United States, must act like competitors - and keep their tax and expenditure policies competitive while improving their efficiency in the delivery of services.
Political leaders in other major industrial countries who continue to contemplate tax reductions no doubt chuckled in October when American political leaders agreed to raise tax rates. The American capitulation made foreign leaders' efforts to attract and build their capital bases altogether easier - at the expense of Americans.
Moreover, by 1992 the Republican and Democratic candidates for the presidency must learn that government's power to soak anyone is not nearly as great as they may think. Much income remains mobile, easily moved out of the IRS's reach in the old-fashion way, through tax avoidance and evasion. Plus, many American citizens will take advantage of the ultimate tax loophole: They will work, save, and invest less, depriving the country of would-be production, and the federal government of would-be revenues.
When the top US marginal income tax rates were lowered from 70 percent to 28 percent in the 1980s, the top 1 percent of taxpayers responded by paying more taxes, and increasing their share of the federal income tax burden from about 18 percent in 1979 to 27 percent in 1988, according to Harvard economist Lawrence Lindsey. The recent, albeit modest, increase in the highest marginal tax rate from 28 percent to 31 or possibly 33 percent (depending on income level and deductions) will do nothing but undercut the gains in the tax share paid by the wealthiest Americans, thus hiking the tax share of other Americans and further reducing the competitiveness of American fiscal policies and markets. It is hardly coincidental that the dollar depreciated precipitously against the mark and the yen over the past six months, during which higher tax rates became a real threat.
The presidential candidates in 1992 will revive Ronald Reagan's 1980 campaign theme of lower tax rates and expenditures because it will once again have tremendous political appeal. By 1992, Americans at all income levels will realize that lower tax rates will be needed to get the country moving again, to keep the inflow of foreign investment funds coming, and to discourage the outflow of American investment funds. They will understand that uncompetitive government fiscal policies in a competitive, fluid world economy simply will not work for long.
The theme of the 1992 presidential election will be renewed prosperity and growth, which can benefit all, not the theme of envy and redistribution, or taking from Peter and Mary to pay Paul, that has characterized so much of this year's political talk. Why? Peter and Mary do not have to sit there and take it any longer.