There is no evidence that a modest tax increase on the rich will have any significant economic impact. People who contend otherwise purport to have a better understanding of the Laffer Curve than Arthur Laffer himself. Anyone who contends knowing where the line exists between where raising taxes hurts productivity and reduces revenue, and between where it increases revenue with little harm to productivity, is selling you a bill of goods…for goods they don’t own. We need look no further than the Bush tax cuts now debated, which did little to nothing to improve economic growth.
For my part, I am fully in favor of low taxes, but forced to acknowledge that the budget will not be balanced by spending cuts alone. And I remain adamant that spending cuts must come first before taxes are raised. But, we should understand that our fundamental economic problem is not a tax structure that taxes too much, but a disastrous imbalance between spending and revenue. There are tax rates which need to be cut, but they are not the individual tax rates.
The rich pay the highest percentage of tax revenues received. That does not mean that they have the highest effective tax rates, nor that they use government resources the least. In fact, the rich have the most capability to avoid high tax rates, by virtue of the mechanism by which they receive income, and they take disproportionate advantage of tax breaks and tax avoidance measures that are not only perfectly legal, but best crafted for the rich. All one need do is look at wealthy farmers to see the aptness of the point, or note that poor and lower middle class people do not get to write off mortgage interest or avail themselves of cheap financing available from tax-free equity loans on McMansions.
The amount of revenue raised is likely to be greater than that raised by increasing rates on any other quintile of taxpayer. One cannot have it both ways, in saying that the rich pay disproportionately more, while contending that raising their rates would yield no increased revenues.
There is no evidence that raising individual taxes would have any effect on productivity, particularly if there were a corresponding tax cut made on the corporate income tax.
The single greatest drag on the American economy is not high marginal tax rates threatening economic activity. It instead, is doubt about what the US government will do about financing the huge deficit, and debt load, it refuses to cut or levy taxes for the paying thereof. The US economy will do nothing to take off until the deficit is resolved. Tax increases will be a part of that equation. And the tax increases will fall disproportionately on the rich for the simple fact that the American tax code can hardly be made more progressive than it already is. With just under half the American working populace paying no federal income tax, the only segments upon which taxes may be raised is upon the upper middle class and the rich.
If conservatives are too be taken at all seriously in the matter, they had best re-familiarize themselves with the Laffer Curve they purport to know so well, and also take the time to familiarize themselves with all of the tax deductions that serve to lower the effective tax rates of the rich and not-quite rich of the upper middle classes. As long as the Grover Norquist crowd regard a capping on the home mortgage interest deduction as a tax increase there will be no coherence to the conservative argument on taxation.
Conservatives are not going to get away with making cases for the federal deficit existing purely because of “waste, fraud, and abuse” anymore either. The principle cause of the deficit is spending on three programs, the majority of which benefit the wealthiest segment of American society, in Medicare, Medicaid, Social Security, and interest on the debt. The wealthiest quintile of the American populace is that over sixty years of age, the very group that Medicare and Social Security dollars flow to. Heath care and Social Security are provided to the wealthiest of Americans irrespective of need or income. A retiree with an income of one million dollars per year still receives Social Security payments and his health insurance from the government. If anything significant is going to be done about the federal deficit it will of necessity come in government health insurance programs and Social Security.
One of the areas taxes will be raised on the rich will be in increasing the amount of earnings that are subject to Social Security, which is currently a regressive form of taxation. Another will be found in indexing Social Security benefits for income. The argument that seniors paid in and thus are entitled will be put to rest at last. They also contributed to the purchase of aircraft carriers, but I’ve yet to hear of a senior who expects to receive one as a retirement benefit. Relatively wealthy retirees will also be expected to buy their own health insurance; another “tax increase”.
And, if taxing the rich, while reducing their benefits, doesn’t work the middle class, whose taxes are at historic lows, will be forced to contribute more. It is long past time that the federal books balanced, and the simple reason they don’t is because of spending we do on ourselves, often without regard for personal need. That will not continue for, it cannot continue. Deal with it.
For more on the facts:
Essential Facts About the Federal Budget - WSJ.com