Mike Hihn, Editor Publisher

Tinkerbelle Economics

(Cato's Maxtax)

Copyright 1997-2016 by Liberty Issues and Michael J. Hihn. All rights reserved.

"Cato doesn't know what tax rate we pay now.  ... Moore also confuses gross income with taxable income.  I'm not making this up, as you can see for yourself."

In previous columns, I've ridiculed -- with documentation -- the GOP notion that tax cuts of $100-250 billion per year can pay for themselves.  Apparently they can pay for themselves -- if we believe they can -- a notion I now call Tinkerbelle Economics.

The latest example of Tinkerbelle Economics comes (sadly) from the libertarian Cato Institute.  Cato's ''Maxtax'' was announced in a January 14, 1997 Wall Street Journal op-ed, written by Stephen Moore. 

National Review (2/10/97) chirps that the plan combines ''policy wonkery, political savvy, and conceptual elegance.''

Well, no. It's a large tax increase for most taxpayers, a tax cut for only the top 0.8%

The conservative media has again failed to apply healthy skepticism to what they want to believe.  So my readers get another scoop.

Readers will recall Hihn's Law (Tax Quacks):  It's impossible to replace the federal income tax with a single-rate tax on income or consumption -- without either (a) ballooning the deficit, or (b) creating huge tax increases on the middle class.

Cato's Maxtax, does both, massive deficits and a large tax increase on the middle class.  The "plan" was created by Cato's Stephen Moore, yet another Tax Quack.  Moore doesn't know what tax rate we pay now.

Over 70% of all taxpayers now pay no more than the 15% marginal income tax rate.  But Moore states  a tax rate of 17.35% ''would lower marginal tax rates for virtually all taxpayers.''  This is a massive blunder.

Moore also confuses gross and taxable income.  He describes his Maxtax as a tax on gross income.  (emphasis added)

""Why not allow every taxpayer to choose between the current income tax system or an alternative post maximum tax (MAXTAX) with a flat rate of 25 percent of gross income that could be filled out on a postcard return? Only one deduction would be permitted under the MAXTAX: a credit for the payroll tax paidó7.65 percent for a salaried worker and 15.3 percent for a self-employed worker. "

Incredibly, he compares his tax on Gross Income with the current rate on Taxable Income.

''The current income tax rate of 28% for middle-income households earning $40,000 per year would fall to 17.5% ...'' 

28% was the current rate on Taxable income .... starting at $40,100 ... after all current deductions.  On average, that's on an Adjusted Gross Income of $60,300 ... the top 12% of all taxpayers.  The average rate at $40,000 taxable was 10.4%.  (Documented below)

Current:  10.4% x  $40,000 = $4,160.

Cato:  17.35% x $60,300 = $10,462  (a tax cut!!!!)

 

Cato's Maxtax cuts taxes on only the top 0.8%, with a hefty tax increase for everyone else!

Don't take my word for it.  Page 341 shows 1996 IRS average effective tax rates by income level.   See the column Tax As a percent of AGI.  Compare with Cato's Maxtax at 17.35%.  If you don't want to plow through the entire IRS booklet, this is just that Table.

Adjusted Gross Income

% AGI

Maxtax

$30,000 - 39,999 10.1% +74%
$40,000 - 49,999 10.7% +62%
$50,000 - 74,999 12.3% +41%

use full 25%, no FICA rebate

$75,000 - 99,999 15.0% +67%*
$100,000-199,999 18.5% +35%*
$200,000 - 499,999 25.8% (3%)*
$500,000 - 999,999 30.0% (17%)*
$100,000.000 + 31.2% (20%)*

1993 data, but 1996 Table latest available at the time. 

Does not include larger FICA rebate to self-employed

$200,000+ AGI  = 954,000 of 113,605,000 returns

* = full 25% (no FICA rebate)

 

This is yet another feature of Tinkerbelle Economics:  falsely describe a tax cut for the very rich as a tax cut for ''virtually all taxpayers.''

No problem!  Moore claims his plan will be subjected to ''ferocious opposition of Washington's army of special interests.''  Dick Armey said virtually the same thing, and you've already seen how bogus his flat tax is.  Cato's is actually worse.

When their plans are attacked as ''another tax cut for the rich'' -- which it is -- conservatives have already been warned to expect another conspiracy by those evil progressives.  Check my sources.

HOW IT WORKS

The self-employed get that larger FICA rebate.  So the primary beneficiaries of Cato's Maxtax are the rich, and/or the self-employed.  These just happen to be the  primary contributors to Cato.

If you support tax cuts for the highest-income taxpayers -- as I do -- then be honest enough to say so.  This forces you to do what Kennedy and Reagan did, cut taxes across the board.  Their tax cuts launched the only peacetime booms since the 1920s.  That's what Moore claims.  But you've just confirmed the sad truth.

Oh yeah, you also have to cut spending.


UPDATES include easier links for you to confirm.