I know I’ve beaten this drum several times before, but the Wall Street Journal today has a very good explanation of why class-warfare tax policy will backfire. The Journal’s editorial focuses on what happened after the 2003 tax rate reductions. And below the excerpt, you’ll find a table I prepared showing what happened with tax revenues from the rich following the Reagan tax cuts. The simple message is that lower tax rates are the best way to soak the rich.
Congress’s Joint Committee on Taxation recently dropped a study claiming that millionaires will pay $31 billion of the $36 billion in revenue that it expects will be raised next year if tax rates rise as scheduled on January 1. …If you believe that, you probably also believed Joint Tax when it predicted that the rich would gain a huge tax windfall when tax rates were cut in 2003. Let’s go to the videotape. According to the most recent IRS data on actual tax payments, total revenues collected over the period 2003-07 were about $350 billion higher than Joint Tax and the Congressional Budget Office predicted when the 2003 tax cuts were enacted. Moreover, the wealthiest taxpayers paid a larger share of all income taxes from the beginning to the end of this period. The IRS data show that in 2003 those with incomes above $200,000 paid $313 billion in income tax. By 2007 they paid $610 billion. …Guess what income group paid the most in higher taxes after tax rates were cut? Millionaires. From 2003 to 2008, millionaires increased their tax payments to $249 billion from $132 billion. One reason for the big increase in payments: the number of returns declaring $1 million or more in income increased 76% to 319,000 from 181,000 as the economy expanded. The IRS data are a useful reminder of how dependent Uncle Sam is on the rich to pay the government’s bills. …We’re not saying that tax cuts “pay for themselves.” What we are saying is that the 2003 tax cuts proved again, as we should have learned in the 1960s and 1980s, that rich people are the most responsive to changes in tax rates. When tax rates are high, the wealthy invest less, hire accountants to protect more of their income from the IRS, and park more of their money in tax shelters, such as municipal bonds. …That’s why it’s a fantasy to think that raising income and capital gains and dividend tax rates on the rich is going to pry $31 billion out of millionaire households. History teaches that the best way to soak the rich and reduce the deficit is to promote rapid economic growth. But that’s less likely to happen in 2011 if the economy is rear-ended with the biggest tax increase in at least 16 years.
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] show recently, where I debated against Robert Reich. I made (what I hope are) good points about the Laffer Curve and the big-government policies of both Bush and […]
[…] The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] 3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] 3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] 3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] 3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior. […]
[…] in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock […]
[…] in the United States and there is every reason to expect similarly poor results. I've already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn't shock […]
[…] in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock […]
[…] in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock […]
[…] in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock […]
[…] Laffer Curve is one of my favorite issues (see here, here, here, etc). But it is a very frustrating topic. Half my time is spent trying to convince left-leaning […]
[…] Laffer Curve is one of my favorite issues (see here, here, here, here, here, etc). But it is a very frustrating topic. Half my time is spent trying to convince […]
[…] Laffer Curve is one of my favorite issues (see here, here, here, here, here, etc). But it is a very frustrating topic. Half my time is spent trying to convince […]
Everyone (and I mean everyone) should read the book “The Trouble with Billionaires”. I won’t explain…just read it.
[…] and reform tax systems, an approach that simultaneously would boost growth and improve compliance (as happened during the Reagan years). Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other […]
Motivation, Motivation, Motivation!
It is NOT the dollar amount that is paid that is important. It is the TAX RATE that is important.
As a businesswoman, I can tell you that the rich are not stupid people! Thankfully! However!
When faced with a High Tax, the smart ones INVEST in the economy to avoid the higher tax bracket on their personal incomes. Look it up! For the 7 years prior to the Great Depression, our sliding scale tax system gave the wealthiest a low tax rate. Bush did the same thing, and, voila! we slumped and almost Dumped.
The wealthiest need motivation to invest in the economy that will increase jobs, holdings, etc. But, why should they when they think that Americans may be suckered into giving them a free ride on their section of the sliding tax scale?
No one pays taxes willingly or happily!! come on!
[…] tax base. This doesn’t mean that “all tax cuts pay for themselves.” That only happens in very rare cases. But it does mean that good tax cuts (i.e., lower tax rates and reduced double taxation of saving […]
[…] and reform tax systems, an approach that simultaneously would boost growth and improve compliance (as happened during the Reagan years). Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other […]
[…] The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance. Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other […]
[…] The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance. Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other […]
It only makes sense to me that raising taxes on investment and growing your business would have negative pressure on growing the economy as a whole. This would simply incentivise those people who have money to invest to hold onto it. If these tax cuts expire, the margins in which an entrepreneur would have to operate their business to maintain profitability would further increase, keeping more people out of the arena! Scary thought. We monitor changes to tax laws and have a free newsletter spelling them out in layman terms at http://www.federaldirecttax.com. Feel free to check it out. Hopefully we will be reporting soon that they choose to extend these tax cuts in an effort to continue the struggling and fragile economic recovery!
The truth is that there does not seem to be visible widespread change of behavior on part of innovative and top producing people in America. Do you see the Steve Jobs and Larry Ellisons dropping out of the productive workforce like flies? No.
So how is the economic misery that Mr. Mitchell often alludes to, going to come about? It will come about through the VICIOUS CYCLE.
THE VICIOUS CYCLE:
While there is no widespread feeling that productive people are dropping out of the economy like flies, at the margin, some productive people will retire earlier, some will work a little less and spend more time with their families, some will take more sabbaticals, some dual income families will revert to single income etc. While these will not be drastic changes in behavior, there will be some minor loss of productivity, let’s say just 2%-3% loss to make an example. While 2%,3% is not an enormous amount, it will nonetheless be felt to some extent by the entire nation through somewhat lower prosperity, somewhat higher unemployment, and somewhat higher economic distress in general. And how does the general population typically respond to economic distress? By voting for a little more class warfare, a little more regulation, a little more central planning, all further productivity incentive reducing measures which then decrease productivity by another 2-3%. Thus you have the unstoppable vicious cycle.
THE WEST IS DOOMED:
The unstoppable vicious cycle, leads, irreversibly, first to the European welfare state — though a European Welfare state with American intellectual level citizens will most likely fare even worse than Europe. After the welfare state, the next step is something along the Greek scenario. While all of Europe is more or less headed in the Greek direction, the collapse will not come soon enough to prevent Americans from getting into the vicious cycle I described. Thus, the entire West is doomed towards productivity parity (and thus prosperity parity) with 3 billion people on this planed who seem to have broken enough of their collectivist chains to be on a fast catch up development path.
So, bye-bye West and bye-bye American dream. You once were the leader in the morality and economic efficiency of individualism. But while others started copying you in the liberating force of individualism, you stalled and even reversed course. So forget exceptional prosperity, you are going down into worldwide averagedom.
So party for just a little longer, secure a lifeboat, steal the wallets of the fools who still believe in the Titanic (that would be, for example, Silicon Valley residents who believed in “hope and change”), and jump off the boat to a life of more leisure, more family time, less stress, more yoga… more… of the few remaining things that increase your standard of living without participating in the productive economic cycle (and thus, by consequence, offer nothing to the collective at large).
Coming from an Ex-Greek, I’d take the advice seriously.
Didn’t Andrew Mellon figure out in the 1920s that rich people will do all they can to avoid paying the higher rate of tax so it would be better to just use a lower tax rate that they will actually pay?