Note the trends. The share of taxes paid by the bottom 95 percent has been declining for 20 years. The share paid by the top one percent has been increasing over the same period.
In 2007, the top one percent paid 40.04 percent of total income taxes, while the bottom 95 percent paid 39.4 percent. In 2008 the tax returns from high-end filers plummeted, due to the recession, and the top one percent paid 38 percent of all federal individual income taxes, while the bottom 95 percent paid 41.3 percent. These numbers are the latest available from the IRS, based on its updating of 2008 data as of October 2010. Although the top one percent did not pay more than the bottom 95 percent in 2008, the top 5 percent still paid far more (58.7 percent) than the bottom 95 percent (only 41.3 percent.) By contrast, the top 5 percent paid only 21 percent of individual federal income tax receipts in 1980 and 22.67 percent in 1985.
Yet we hear Obama demanding higher taxes on the wealthy to make them pay their “fair share.” Isn't their huge share of the tax burden already more than fair? According to the Tax Foundation, “We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.”
Aside from the question of “fairness” and a man's property right to what he earns, Obama tax policy displays an ignorance of private wealth in job creation. The wealthy are the job creators. That's how most of them became wealthy. Only a small percentage of the wealthy inherited their wealth. Let me give you a few examples of wealth creation—and job creation.
Steve Jobs died recently. His genius created the Apple computer, the iphone, the ipod, itunes, and the ipad. He started his company with partner Steve Wozniak as a small business in a garage. No government stimulus or subsidies from taxpayers. When he died, Apple Inc. was a thriving company with 46,000 employees.
Earl Bakken and his brother-in-law set up shop in a garage in northeast Minneapolis a mile from my home. They called it Medtronic and began repairing medical equipment. This led to the first wearable heart pacemaker. Pacemakers had already existed, but they were bulky, relied on external electrodes, and had to be plugged into an AC wall outlet. Earl developed a pacemaker powered by mercury batteries that provided a 9-volt DC pulse and could be worn.
In 1960, with its experience in early pacemakers, Medtronic acquired the exclusive right to the implantable pacemaker invented by Drs. Chardack and Greatbatch. The company's sales increased, it hired more people, and erected a new building to house the expanding corporation. But in 1962 it was on the brink of bankruptcy. The company obtained a $100,000 bank loan, attracted money from a venture capitalist, and in 1963 was back on track financially. In 2011 the company, now a broadly diversified medical innovator, introduced 60 major new products, had $15.9 billion in revenue (43 percent from international business) and had more than 40,000 full-time employees.
Sergey Brin and Larry Page were two graduate students at Stanford University with an interesting idea for retrieving the endless amounts of information available on the internet. They struggled to find financial backing without success until they met Andy Bechtolsheim, a founder of Sun Microsystems, who recognized an opportunity where others didn't. He quickly wrote a $100,000 check to an entity that didn't exist yet. That was the start of Google Inc., which then opened its first corporate office in a friend's garage. In 2011, Google had 31,353 full-time employees and a net worth of $190 billion.
These are the “millionaires and billionaires” whose taxes Obama wants to increase. Wouldn't the country be better off with more money in the hands of successful companies and venture capitalists rather than turning more of it over to the government in taxes? Last month Obama said “if you've done well...then you should do a little something to give something back.” Give something back? These inventors and entrepreneurs generated wealth and jobs because they improved our lives, not because they “gave something back.” They already gave the public things of greater value to people than the wealth they received in return. They were benefactors of humanity, created jobs, extended and enriched people's lives, and advanced the nation's economy far more than government could with all the taxes it collected—or could collect—from them. Medtronic has lengthened the lives of millions of people. Google has saved hundreds of billions of hours in research. The benefits society received were of greater value than the money the inventors, entrepreneurs, and investors received or the public wouldn't have bought their products. Higher taxes will inhibit further such progress in the future.
Notice that Apple, Medtronic and Google each began with two-man partnerships in a garage. True small businesses. The U.S. Small Business Administration says small businesses employ over half of all private sector employees, pay 44 percent of U.S. private payroll, and have generated 64 percent of new jobs over the past 15 years. They produce 13 times more patents per employee than large patenting firms, make up 97.3 percent of all identified exporters and produce 30.2 percent of known export value.
According to the Tax Policy Center, most small businesses report their income on personal tax returns. A small business can have as many as 499 employees. So it is not unheard of for small businesses owned by middle-class Americans to have an income over $250,000—which would mean paying higher taxes under Obama's proposal. Though this would apply to only 2.5 percent of small businesses, that small percentage comprises 894,000 small businesses that would pay higher taxes on the owners' personal tax returns.
It is significant, too, that if a private company, whether small or large, fails, it is a loss only for those who voluntarily invested in the company. This is a sharp contrast to the recent example of Solyndra, the maker of solar panels, which received $535 million from the federal government. Solyndra's bankruptcy was a $535 million loss for the taxpayers.
Solyndra is an important example not only because it is one a many solar companies that have now failed and was praised by Obama as “leading the way toward a brighter and more prosperous future.” More importantly, it is representative of a long string of “green” policy failures for decades. In my book MAKERS AND TAKERS: How Wealth and Progress are Made and How They Are Taken Away or Prevented, I included a quotation that I had dug up from 1995. It was by John A. Hill, who had been a deputy administrator for the Federal Energy Agency, the predecessor of the U.S. Department of Energy:
The government has spent more than $100 billion over the past 35 years for clean coal technologies, solar energy, conservation and synthetic fuels; none of these programs added one viable technology to the commercial marketplace.
Sixteen years after Hill wrote that, the trend continues. The federal government is still pouring billions of dollars into such losing ventures to try to prove the “green dreams”—and vote-getting schemes—of politicians are superior to economic and scientific realities. And the failures still keep coming.
Obama's views on government economic stimulus might have been different if he had been willing to learn from Japan's experience. The Japanese economy crashed in 1990. Japan passed 10 stimulus bills between 1992 and 2000. It spent massively on infrastructure, building bridges, roads, ports, airfields—even sidewalks—as well as supplying huge subsidies to the biotech and telecommunications industries. Japan's unemployment rate is now more than two and one-half times what it was in 1992. It has never been that low since, and in the last twelve years—even during the best years before the current recession—it was never less than one and one-half times the 1992 level. Japan's stock market (Nikkei average) remains more than 75% below its peak two decades ago.
Japan's Nikkei 225 Stock Average
Two decades of massive deficit spending failed to restart the once-mighty Japanese economy. Instead of boosting economic growth, the government's spending spree boosted the nation's debt. In 1990, Japan had a debt-to-GDP ratio of 60 percent. Now it is 200 percent. This is the highest of any developed country and probably the highest anywhere in the world. It is far higher than that of Greece, which has caused so much concern. However, Greece's problem is more immediate because 90 percent of its public debt is held by foreigners, while 95 percent of Japan's debt it held domestically.
No country has more completely and energetically put the economic policies of John Maynard Keynes into practice for longer than Japan, and the results have been disastrous. The Japan analogy is especially appropriate because two of the people who urged Japan's stimulus programs were subsequently chosen by Obama for his administration. Larry Summers, formerly at the Clinton Treasury, became assistant to President Obama for economic policy and director of the National Economic Council. Timothy Geithner, current treasury secretary, was in Japan during the collapse and claims the problem wasn't that Japan spent too much but that it didn't spend enough.
Obama favors the Keynesian spending policies that Franklin Roosevelt employed to try to pull the nation out a the Great Depression. They didn't work then, they didn't work in Japan, and they aren't working now—as demonstrated by Obama's last ($800+ billion) stimulus program. After six years of FDR's New Deal policies, the unemployment rate in 1938 was 19 percent—more than double what we have today. Late in FDR's second term, his Treasury secretary Henry Morgenthau wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work....After eight years of this administration we have just as much unemployment as when we started....And an enormous debt to boot.”
History repeats itself.
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