Recently, Dr. Arthur Laffer, of “Laffer Curve” fame, spoke to a luncheon crowd of over 300 invitees of Frost Bank.  Disclaiming any partisanship (economically speaking, he liked Bill Clinton’s presidency), this top advisor to President Reagan and, more recently, Governor Schwarzenegger, made the case for what could be the “largest fiscal tax crisis in our country’s history” if either Senator Clinton or Senator Obama is elected president, along with a Congress filled with Democrats. The crisis: The Democrats’ policy of taxing the rich more and the middle and lower classes less.

The lynchpin to their tax policy, of course, is to let the tax rate cuts enacted under President Bush lapse, so that, for example, the capital gains tax rate increases to 20% from today’s 15%. As Dr. Laffer stated, the rich do think – and act - differently than the rest of us.  This insight comes from analysis of decades’ worth of tax filing data generated by the Internal Revenue Service, which data he claims is the best in the world.

Here is what that insight suggests: cut the top tax rate on the wealthiest, those who earn $1.3 million or more per year, and the country gets more bang for the buck than if tax rates for the middle and lower classes (what Dr. Laffer calls “inframarginal tax rates”) are cut.  The opposite is true: increase tax rates for the wealthiest and the government soon may face a fiscal crisis. Why? Since the wealthy, “do not work to pay taxes.” Being reasonable and financially capable, they will act to avoid, legally, paying the extra tax imposed on them. They will consult lawyers, accountants, and other advisors (a cost the rest of us simply cannot afford) to change the composition, location, and timing of their incomes. Ever wonder why top executives are so willing to accept risky stock options and other forms of “deferred compensation?” A small percentage of the wealthy simply will engage in tax evasion.  On the other hand, cut the lowest tax rate, say, from 10% to 5%, and people like you and us will behave not much differently than before the cut. Indeed, the very lowest income earners pay no taxes at all; many even receive welfare in the form of the income tax credit.

Dr. Laffer likes to give audiences his tax history lesson. In 1961, the top tax rate was 91% and the lowest was 20%.  If someone in the highest-bracket of income earners had an opportunity to earn an extra $1.00 pretax, he would receive only 9¢ after tax; someone in the lowest-bracket of income earners, with the same opportunity, would receive 80¢ after tax. What a wacky America it was in 1961!  President Kennedy urged Congress to cut rates, and it complied in the wake of his assassination. The top rate was cut from 91% to 70% in 1965.  Lower-bracket rates were reduced, as well. What happened? Inflation-adjusted income tax revenue to the federal government, which had been increasing at an annual average rate of 2.1% in the four years prior to the cuts, started increasing by 8.6% annually in the four years after. In 1981, led by President Reagan, Congress again cut the top rate, from 70% to 50%. With further tax rate cuts, including the so-called Bush Tax Cuts (the top rate now stands at 35%), Dr. Laffer notes that the American economy has experienced a bull market since 1982, as reflected in the Dow Jones Industrial Average.

Not everyone rode that bull market, however. Dr. Laffer echoes former Senator John Edwards when he concedes that the gap between rich and poor has grown substantially. But, he warns, government cannot make the poor better off financially by taking even more money from the rich to give to the poor.  Today, according to his analysis, the top 1% of income earners in this country pays nearly 40% of the federal government’s income tax revenue; a change in their behavior will have profound implications for government finances. Indeed, Dr. Laffer fears what he calls “dead weight revenue loss” to the government’s coffers, possibly as much as a 23% loss, if top marginal tax rates increase. As the adage goes, don’t bite the hand that feeds you. If the Democrats take control over tax policy, there’s going to be a whole lot of biting.

Of course, there are many other crises to think about between now and November 4.  There’s the crisis of the collapsing dollar, of a two million or more foreclosures, of an overstretched military, of Congressional overspending and unfunded entitlements, particularly Social Security and Medicare. So, pick a crisis, any crisis. But: “Don’t worry. Be happy.”  We the People are going to avert the crisis simply by showing up at the polls.  Right, guys?

Jeff Turner is a Dallas lawyer and a fellow in constitutional studies at the College of St. Thomas More in Fort Worth.  Mary Voegtle’s most recent position was librarian for a large law firm in Dallas.

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