On Incentives

"Never penalize those who work for us for mistakes or reward them for being right about markets. It will go to their heads, is counterproductive and, in any event, material compensation will not correlate with their ability to predict the future next time."

Site Search

Writings & Speeches

A Losing Tax Proposal

My most affluent investment banker friends loved Bob Dole’s proposed tax plan — particularly the 15% across-the-board cut and the capital gains reduction.  So much so, I suspect, that is one of the reasons he lost the election.  Bob Dole simply squandered the opportunity to attract “ordinary working men and women” to his side, but instead devised a tax plan which primarily rewarded the very affluent.  The facts are as follows:

  • The wealthiest 1% of taxpayers (those earning more than $200,000 per year) would have received 27% of the $132 billion annual tax reduction.
  • The next wealthiest 4% of taxpayers (those earning between $100-$200,000 per year) would have received 16.5% of the tax cut.
  • The average annual reduction in taxes ($29,000) for the richest 1% of taxpayers was greater than the gross income of 56% of American taxpayers.
  • Taxpayers in the highest 40% of income earners would have received 93% of the total tax reduction dollars as compared to the remaining 60% of taxpayers who would receive only 7% of the tax reduction.
  • Taxpayers in the top 20% would have received a tax reduction of $97 billion a year; the remaining 80% of taxpayers would have received a reduction of $35 billion a year.
  • Taxpayers in the lowest 20% income bracket would have had a tax increase.

Voters recognized the distortion of language and logic to call the foregoing a middle class tax cut.  The fact is Senator Dole’s proposal rewarded the most affluent at the expense of the middle class, and both groups voted accordingly.  Apart from fairness, it made no political sense.  One would think that if you were going to take a lot of flak for increasing the deficit and/or cutting services, then, at the least, you should have been able to point to substantial tax relief for the greater numbers of voters whose support you needed.  Moreover, the reduction in services needed to pay for the redistribution of wealth upwards would have been borne disproportionately by the poorest 20% of the population — the very group subject to a tax increase.  They, too, voted accordingly.

The truth is Republican tax policies consistently have moved wealth upwards from the middle class to the most affluent in our society, and any attempt to moderate that movement has been opposed.  Thus, the 1993 tax increase, which Senator Dole claimed was the largest tax increase levied on “working class Americans,” was borne by the richest 1.3% of the population, who paid for 93% of that tax increase.  Bob Dole’s tax reduction plan, if nothing else, was an effort to reverse that event, and by so doing, he forefeited the middle class voter.

A Winning Tax Proposal

Senator Dole should have suggested capping his tax reduction plan for those taxpayers earning more than $100,000 per year — the top 5% of taxpaying families — and distributing the tax dollars which otherwise would have gone to that group to those making less than $75,000 per year.  He then could have pointed to the resulting 40% across-the-board tax reduction for 90% of all taxpayers in the country.  That would have been particularly politically attractive and would have done much to offset voter concerns about the potential reduction in services and “budget busting.”  I cannot imagine that a cap of that sort would have lost many votes of the affluent, who already were Dole supporters under current tax rates and who, in any event, could have been more than compensated by an even slight reduction in the estate tax rate.

Future candidates might well be served, as would the nation, by proposals which distribute tax reductions to the groups at risk rather than by proposals which serve primarily to preserve and enhance the relative financial strength of those least in need at the expense of the far greater numbers of those for whom a 40% tax cut would have made a significant difference.