I speculated last year that the political elite finally might be realizing that higher tax rates are not the solution to Greece’s fiscal situation.
Simply stated, you can only squeeze so much blood out of a stone, and pushing tax rates higher cripples growth and drives more people into the underground economy.
Well, it turns out that even the International Monetary Fund agrees with me. Here’s what the IMF said in its latest analysis about the Greek fiscal situation.
…further progress in reducing the deficit is going to be hard without underlying structural fiscal reforms. The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent. “One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side.
This is a remarkable admission. The IMF, for all intents and purposes, is acknowledging the Laffer Curve. At some point, tax rates become so punitive that the government collects less revenue.
This is a simple and common-sense observation, as explained in this video.
Unfortunately, even though the IMF now recognizes reality, the same can’t be said about the Obama Administration.
The President has proposed higher tax rates in his recent budget and it seems he can’t make a speech without making a class-warfare argument for penalizing producers, investors, entrepreneurs, and small business owners.
Yet if you compare American tax rates and Greek tax rates, it seems that the IMF’s lesson also applies in the United States.
The top tax in Greece is 45 percent, which is higher than the 35 percent top rate in America. But this doesn’t count the impact of state income taxes, which add an average of about five percentage points to the burden. Or the Medicare payroll tax, which boosts the rate by another 2.9 percentage points.
So Obama’s proposed 4.6 percentage point hike in the top tax rate almost certainly would mean a higher tax burden in the United States.
Even more worrisome, the U.S. tax rates on dividends and capital gains already are higher than the equivalent rates in Greece. Yet Obama wants to boost double taxation on these forms of retained earnings and distributed earnings.
But there are important cultural differences between the United States and Greece, so there’s no reason to think that the revenue-maximizing tax rates in both nations are the same (by the way, policy makers should strive for growth-maximizing tax rates, not the rates that generate the most money).
That’s why I wrote about the U.S.-specific evidence from the 1980s, which shows that rich people paid much more to the IRS when tax rates were slashed from 70 percent to 28 percent.
But all this analysis may miss the point. Why is the President willing to raise tax rates even if the economy suffers enough damage that the Treasury doesn’t collect any revenue? And if you’re wondering why I might ask such a crazy question, watch this video – especially beginning about the 4:30 mark.