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Townhall
Finance...
Why High Taxes Will
Never Soak Rich
by Daniel J. Mitchell
April 17, 2012
Whether it’s through the Buffett Rule, higher income-tax rates or
double taxation of dividends and capital gains, President Obama often
demands that “rich” taxpayers and big corporations send more money to
Washington.
But as Americans pay their taxes by today’s deadline, we might note
that trying to get more money from upper-income taxpayers is like
playing whack-a-mole. So long as tax rates are high, rich people will
figure out ways to protect their income.
It doesn’t take a tax genius; any rich person can make a phone call or
hit a few computer keys and shift his or her investments to tax-free
municipal bonds. It’s not good for the economy when capital gets
diverted to help finance the excess spending of Detroit or California,
but it’s an effective way of stiff-arming the IRS.
“Work, production, saving and investment are how we generate national
income, so it doesn’t make sense to discourage taxable income with
higher tax rates.”
Or the rich can play the green-energy scam, getting all sorts of
credits to offset their tax liabilities. That’s one way General
Electric made lots of money and kept it all for shareholders.
Statists often will respond by arguing that we should reform the tax
code. But instead of a flat tax, which would rid us of loopholes and
would lower tax rates, they just want to end the loopholes and keep tax
rates high — or raise them even higher.
Even if lawmakers abolished the various tax-code distortions, they
might still be disappointed. The one sure way for rich people to lower
their tax bills is by generating less income.
Here’s a quick economics lesson for the class-warfare crowd: When the
government taxes income, it raises the price of work compared to
leisure. And because the tax code penalizes capital gains with higher
rates, it also raises the price of saving and investment compared to
consumption.
Yet work, production, saving and investment are how we generate
national income, so it doesn’t make sense to discourage taxable income
with higher tax rates.
This isn’t some sort of modern-day revelation. Andrew Mellon, a
Treasury secretary during the 1920s, noted that “the history of
taxation shows that taxes which are inherently excessive are not paid.
The high rates inevitably put pressure upon the taxpayer to withdraw
his capital from productive business.”
Unlike the rest of us, the rich have a great ability to alter the
timing, amount and composition of their income. That’s because,
according to IRS data, those with more than $1 million of adjusted
gross income get only 33 percent of it from wages and salaries. The
super-rich (those with income above $10 million) rely on wages and
salaries for only 19 percent of their income.
In 1980, when the top tax rate was 70 percent, rich people (those with
incomes of more than $200,000) reported about $36 billion of income;
the IRS collected about $19 billion of that amount. So what happened
when President Ronald Reagan lowered the top tax rate to 28 percent by
1988? Did revenue fall proportionately, to about $8 billion?
Folks on the left thought that would happen, complaining that Reagan’s
“tax cuts for the rich” would starve the government of revenue and give
upper-income taxpayers a free ride.
But if we look at the 1988 IRS data, rich people paid more than $99
billion to Uncle Sam. That is, because rich taxpayers were willing to
earn and report much more income, the government collected five times
as much revenue with a lower rate.
To be sure, many other factors helped account for the explosion of
taxable income, including inflation, population growth and other
pro-growth policies. So we don’t know whether the lower tax rates on
the rich caused revenues to merely double, triple or quadruple.
But we do know that the rich paid much more when the tax rate was much
lower.
Now Obama wants to run the experiment in reverse. He hasn’t proposed to
push the top tax rate up to 70 percent, thank goodness, but the
combined effect of his class-warfare policies would mean a big increase
in marginal tax rates.
That might be good for workers in China, India or Ireland, because
American jobs and investment would migrate to those places. But it’s
not the right policy for the United States.
Read this and other articles at Townhall Finance
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