Did the President Ever Take an Econ Class?

In his latest piece, Thomas Sowell takes apart what President Obama recently said about the need to "tax the wealthy" and admonishing those evil Republicans who "believe that prosperity comes from the top down, so that if we spend trillions more on tax cuts for the wealthiest Americans, that that will somehow unleash jobs and economic growth.”

Here is Dr. Sowell on the manifest errors present in the preceding sentence:

Let us begin with the word “spend.” Is the government “spending” money on people whenever it does not tax them as much as it can? Such convoluted reasoning would never pass muster if the mainstream media were not so determined to see no evil, hear no evil, and speak no evil when it comes to Barack Obama.

Ironically, actual spending by the Obama administration for the benefit of its political allies, such as the teachers’ unions, is called not spending but “investment.” You can say anything if you have your own private language.

But let’s go back to the notion of “spending” money on “the wealthiest Americans.” The people he is talking about are not the wealthiest Americans. Income is not wealth — and the whole tax controversy is about income taxes. Wealth is what you have accumulated, and wealth is not taxed, except when you die and the government collects an inheritance tax from your heirs.

And the biggest error of them all:  that higher tax rates lead automatically to higher revenue:

A Democratic president — John F. Kennedy — stated the issue plainly. Under the existing tax rates, he explained, investors’ “efforts to avoid tax liabilities” made them put their money in tax shelters, because existing tax laws made “certain types of less productive activity more profitable than other more valuable undertakings” for the country.

Ironically, the Obama campaign’s attacks on Mitt Romney for putting his money in the Cayman Islands substantiate the point that President Kennedy and others have made, that higher tax rates can drive money into tax shelters, whether tax-exempt municipal bonds or investments in other countries.

In other words, raising tax rates does not automatically raise tax revenues for the government. Higher tax rates have often led to lower tax revenues for states, the federal government, and other countries. Conversely, lower tax rates have often led to higher tax revenues. It all depends on the circumstances.

Probably the best example I can think of is when Warren G. Harding entered office in 1921, the top marginal tax rate was 75%.  After Harding's successor, Calvin Coolidge, left office in 1929, tax rates were down to around 25% but tax revenues were up 300% from where they were during the end of Woodrow Wilson's presidency.