Party of Reagan forgets Reagan

They, some Republicans, are at it again with the pipe dream of helping the middle class by making the rich much richer. We speak of Tim Pawlenty, Minnesota governor and candidate for president. His extraordinary vision for reviving the economy: Stop taxing investment income, and money will come pouring into the U.S. Treasury.

The assumption is that by freeing capital gains, dividends and interest income from the burden of taxation, a resulting flood of investment will turbo-charge the economy, leading to more jobs for you and me. Thus, the tax cuts will pay for themselves.

This theory was utterly discredited within the living memory of today’s 4-year-olds, but it will not die in some Republican circles. Studies by the U.S. Treasury found that the tax cuts of the George W. Bush era recouped only 10 percent of the lost revenues they caused.

Let’s not push all potential Republican candidates into the same dunce’s corner. The almost-but-not-running Indiana governor, Mitch Daniels, has said that higher taxes may be needed to tame deficits. And the most recent declared candidate, former Utah Gov. Jon Huntsman, has refused to sign the ridiculous “no-new-taxes” pledge.

Anyhow, the Tax Policy Center ran the numbers and estimates that Pawlenty’s plan would reduce tax revenues by another $112 billion in 2012. Through 2021, tax revenues would be down $11.6 trillion. Now that’s going to help restore global confidence in America’s fiscal sanity. Not.

And that explains why many upper-income Americans support higher, not lower, taxes. They know that they do better when their government appears to be functioning in a fiscally responsible way. Furthermore, they like their country.

What’s most astounding about Pawlenty’s plan is that it would virtually end all taxation for the idle rich who live off investments. No tax on capital gains. No tax on interest or dividend income. It’s a fact of American life that the richer one is, the more one’s income is likely to come from investments. The top 10 percent owns 88 percent of all investment assets, and the bottom 90 percent has 12 percent. (Pawlenty would also cut marginal tax rates and slash spending – exactly where, he does not specify.)

At least he doesn’t pretend that tax cuts for investments directly trickle down to Average Joe. In 2006, Bush told the Economic Club of Chicago, “American families across this country have benefited from the tax cuts on dividends and capital gains.” That was true. Rich people in Seattle, billionaires in Omaha, tycoons in Houston, upper-income folk in Nashville, Wall Street barons in New York – yes – rich people all over benefited mightily from investment income, if they held major-league portfolios.

Bush had based his claim on the then-accurate but misleading statistic that half of American households “now have some investment in the stock market.” The reality was that many of these households held meager amounts of stock, and most of it was in 401(k) plans or IRAs that already enjoyed tax advantages. More than half of the capital gains and dividends subject to taxation was going to households raking in more than $1 million, and more than 78 percent went to families making more than $200,000.

On the hustings, Pawlenty complains that “President Obama is not behaving like Ronald Reagan,” but Pawlenty is acting the opposite of Reagan. Reagan raised the capital gains tax for high earners to 28 percent, up from 20 percent. He reasoned that since marginal income tax rates were being axed, there was no reason to tax income from investments differently from the type people sweat for.

If only the party of Reagan were more the party of Reagan.