Monday, August 2, 2010

News Flash: Soaking the Rich Doesn't Work!

Shockingly, or not if you are even slightly observant, raising taxes on the rich decreases their share of tax revenue and lowering taxes on the rich increases their share of tax revenues. Arthur Laffer once again demolishes the notion that the rich don't pay their fair share and that taxing the rich helps the little guy.

Since 1978, the U.S. has cut the highest marginal earned-income tax rate to 35% from 50%, the highest capital gains tax rate to 15% from about 50%, and the highest dividend tax rate to 15% from 70%. President Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0% for almost all home owners. We've also cut just about every other income tax rate as well.

During this era of ubiquitous tax cuts, income tax receipts from the top 1% of income earners rose to 3.3% of GDP in 2007 (the latest year for which we have data) from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP from 5.4% of GDP over the same time period.

Why does it never work to “soak the rich”? Because the rich have better lawyers and accountants. People who are rich don’t get there by being stupid….

The highest tax bracket income earners, when compared with those people in lower tax brackets, are far more capable of changing their taxable income by hiring lawyers, accountants, deferred income specialists and the like. They can change the location, timing, composition and volume of income to avoid taxation.

As Laffer also points out, famous wealthy “tax and spend” liberals like John Kerry and Howard Metzenbaum have taken advantage of our screwy tax laws to shelter themselves from taxes, a strategy that is less available to those without the means to pay for fancy tax attorneys and accountants.

Increasing taxes on the rich doesn’t make the little guy less poor, it just discourages the rich from engaging in investment activities that in turn create jobs for the very people that raising taxes are supposed to help. Tax policy is little more than a cynical play used by politicians to curry favor with ill-informed voters. Those very same politicians, many of whom are fantastically rich, use the convoluted tax code to hide their own income from taxation. Meanwhile the nation continues to spend money it doesn’t have based on tax revenues it will never realize.

Wake up people!
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