Tax the rich! Sounds pretty simple, doesn't it. Well, it's not: people are smarter than planners.
Neil Reynolds at the Globe and Mail writes: A millionaires’ tax is all the rage, but it’s another thing to collect
One of the champions of a “millionaire’s tax” has been Chicago economist Austan Goolsbee, who chaired Barack Obama’s Council of Economic Advisers for a year until he stepped down in August. Yet, back in 1999, Mr. Goolsbee concluded (in a research paper) that “higher marginal tax rates led [in the 1990s] to a significant decline in taxable income.” In his study of America’s richest million taxpayers, he found that “a small number of executives,” by themselves, accounted for 20 per cent of the decline.
AM: Tax revenue = tax rate X tax base
The catch is this: when you raise the rate, you shrink the base. Higher rates kill economic activity and encourage people to find new ways to avoid paying.
Just being a pain here, but wouldn't it make more of an impact if, say, he'd written this paper less than 11 years ago?
ReplyDeleteI mean, isn't that plenty of time for a person to change their perspective on something?
Maybe he read more papers in those 11 years?
Also, I think what would be very important here is to know who those 20% of executives were, and what are the odds they just upped their "tax evasion" game when taxes were raised?
(rich guys don't do that!!!)
Not to suggest that it's completely within their rich-guy liberal rights to be very upset at the ghastly spectre of sharing!
ReplyDeleteIt's not a question of sharing: higher tax rates can reduce the tax base. Imagine you had to pay 100 percent of your income to the government. Would you still go to work? You'd probably go work under the table. So you'd pay no taxes. That higher tax rate would yield no revenue because it would have shrunk the tax base. In econ this is the laffer curve, but to me, it is just common sense.
ReplyDeleteWould you support a 60 percent income tax rate on the top income bracket if the result was that the revenue from this stream actually declined? If so i'd love to hear why. The entire point is to raise revenue!
How many firms in the U.S. have decided it's better to relocate their HQ's to places like Switzerland rather than pay a ridiculous 35 percent corporate tax? Those firms are no longer paying anything to the U.S. gov b/c of the tax rate. Guess who does pay that? The firms that can't afford to move overseas. Smaller, medium sized businesses. Are those the guys you want to tax? Same thing with higher tax rates on the rich - the base declines and the money has to come from somewhere...
Come on, AM! It just takes a little political will to get the rich to pay more taxes. Look at The U.S. in the 1950s, the highest marginal rate was like 90 percent!!!! It's slowly come down over time!
ReplyDeleteHM
That's great HM. I wonder what the effective tax rate was. Probably way lower. Anyway... I could be wrong about that. But really, that was the entire point of the post - how does a 90 percent top marginal rate affect the base?
ReplyDeleteI agree, corporate tax rates in the U.S. do need to come down, since in a globalized economy, they can simply relocate. Therefore, a perk such as a competitive tax rate is important as well as the spinoff effect. However, individual tax rates and corporate tax rates are a very different beast. One can surely argue that corporate taxes could be lowered, but in consequence, taxes to the ultra rich be raised. Therefore, resulting in more reason to setup shop or stay in business in the first place. One must find a happy middle ground where there is a net benefit for both jobs and the economy. Now AM, let's not try to sound too much like the Republicans. Raising taxes for the rich should be considered, it just requires careful planning. Something governments rarely do well unfortunately.
ReplyDeleteOf course, anon, those higher rates might not produce more revenue (for the reasons mentioned). They might, but it's an empirical question. Also, the private sector might have done something better with that tax money.
ReplyDeleteAnyway: I agree with tax reform; but the base should be wider, the rates lower, and the tax code "simpler".