The Internet is Bad News for Tax Raisers

October 17, 2012 by

Bad news for tax-and-spenders. The Internet is making it harder to raise tax revenue.

Governments can still raise taxes, but that doesn’t mean they’re going to raise revenue they had hoped to raise. And for leftists, it doesn’t mean they’re going to inflict the punishment on the rich that they had hoped to inflict.

That’s because thanks to the Internet and the information economy, many businesses can be run from anywhere. Business owners can simply set up shop in another country or jurisdiction whenever the government wants to take more of their money.

A case in point is France. The new president there jacked up the top tax rate from a whopping 48 percent to a whopping 75 percent.

A recent article reports that “Start-up entrepreneurs (are) looking to move their headquarters out of France and taking their families with them.”

With the Internet “it is now possible to work in any corner of the world and come and spend one week a month in France,” said Thibault de Saint Vincent, president of Barnes France, the principal competitor to Daniel Feau.

You can tax people more, but you can’t make them stick around.

It’s yet another reason why cutting the budget deficit calls for spending cuts, not tax increases.

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Swedish Tax Rates in a Spanish Culture

March 5, 2012 by

Spain is becoming one of Europe’s highest-taxed countries, with a top marginal tax rate of 52 percent, near that of Sweden at 56 percent.

It isn’t going to work. (Felt like saying “ain’t” but want to set a good example.)

Such a high tax rate is more feasible in Sweden (or less unfeasible) because the rule of law is much stronger there – perhaps the strongest in the world. There’s something about Sweden’s culture such that people comply with the law to a much greater extent than anywhere else. Although to be sure, even Swedes can have trouble paying that much. One of my sports heroes, Swedish ski racing legend Ingemar Stenmark, moved to Monaco. Why? According to Wikipedia, for tax reasons. Tennis star Bjorn Borg moved to Monaco too, as did lots of other Swedish millionaires.

Generally, the farther south you go in Europe, the less strong is the rule of law. People flout the law to a greater extent. Greece is a prime example. They kept jacking up the tax rates on the rich, but many rich don’t pay. And they can get away with it due to a weaker rule of law.

It’s a similar culture in Spain. I haven’t been there, but I’ve been to other southern European countries -  Italy and Greece. Just from a country’s “curb appeal”, you get sense of how orderly things are there. How well drivers obey the traffic rules. How well pedestrians wait for the walk signal before they cross the street. How clean the streets are. How well things are maintained. The more orderly things look in a particular country, it’s a good bet that the more people comply with paying their taxes, too.

So if Spaniards see Sweden with a 56 percent tax rate and wonder why they can’t have the same thing in Spain, there’s good reason why they can’t. You’re not going to raise the same kinds of revenues that you would in Sweden. Tax evasion will be rampant.

(It’s a similar situation with the United States. Lefties here look upon Sweden’s and Germany’s tax rates with wistful eyes, but those rates aren’t going to work here. Ever seen a German at a crosswalk and refuse to budge when the don’t walk sign is flashing, even though there are no cars around? Happens a lot. The rule of law is stronger there than here. In America, if there are no cars, hell, why stand there – walk!… And in Mexico, I’ve noticed that if you’re in your car at a red light and there are no cars around, then drive! Like I said I haven’t been to Spain, but maybe it’s a similar situation there. If you know, then let me know.)

So until Spain gets out of its debt predicament mainly by cutting spending rather than by raising taxes, it’s going to remain mired in debt and stagnation.

That’s confirmed by a study, referred to in a previous post. After analyzing the experiences of dozens of countries in attempting to reduce their debt-to-GDP ratios, the researchers found that the instances of failure mainly relied on large tax increases and only modest spending decreases, if any.  Instances that succeeded mainly relied on large spending decreases and only modest tax increases, if any.

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The Evilization of Policy Differences

December 22, 2011 by

Here’s a comment I wrote in response to “Don’t Extend The Ill-Conceived, Evil Payroll Tax Cut“, by one Louis Woodhill, in Forbes:

First, avoid the evilization of policy differences. To casually call your political opponents evil is thuggish, ad homonym, and immature. Plus it corrupts our language. If you consider someone with a relatively mild political disagreement to be evil, then what do you call people like Hitler, Stalin, and Mao? Super-duper evil?

Second, you say the payroll tax cut doesn’t affect economic growth because “it is not a tax cut on the margin for the people who make the decisions that determine economic growth.” Actually that’s incorrect. It is a marginal tax cut – the kind that positively affects economic growth, increasing the returns on the last dollar earned. I’m a small business person and ran the numbers on this payroll tax cut. Sometimes I turn down projects because the after-tax reward is too modest. The payroll tax cut actually increases the after-tax reward, making me more likely to accept that project after all. Cumulatively, that increases goods and services in the economy, boosting economic growth. (Note: to be sure, cutting other types of taxes, like the income tax, would have a larger positive impact on productive behavior and economic growth. So cutting that would be preferable. If they won’t cut the income tax, though, a payroll tax cut is still better than cutting nothing at all.)

Third, Social Security is already a government transfer program, not an “insurance” program. Unless the payroll tax can be converted into a contribution to a personal savings account, reducing or ending the payroll tax drives home the point that Social Security is a welfare program through-and-through.

So check your numbers again. And quit calling folks evil, unless it’s Osama bin Laden or Jeffrey Dahmer or someone like that.

 

 

 

 

 

 

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Mr. Buffett, Come Clean On How Much Your Secretary Makes

October 23, 2011 by

Here’s an article of mine on rich guilt, positing that Warren Buffett perhaps (emphasis on perhaps) could harbor that emotion. He famously says that his tax rate is lower than that of his secretary. My instinct was to give him the benefit of the doubt on that, because based on what I’ve read about the man, he seems of high moral character.

But in researching the article, I looked into his claim. First there’s the well-known observation that if you take his corporate taxes into account, his tax rate is a lot higher than that of his secretary. Technically he’s referring to individual tax rates so we’ll put that aside for now.

But who is this secretary that he talks about so much? He doesn’t say. Is that her or his official title? Or is it “executive assistant” or something along those lines? If the latter, why doesn’t he refer to her or him as “my executive assistant”?

In any event, in order for her or him to have an effective tax rate higher than Mr. Buffett’s claimed 17.4 percent rate, the secretary must be one very highly paid secretary – much more highly paid than a typical secretary.

Mr. Buffett’s reportedly said that his secretary makes $60K a year. But as Chris Edwards at the Cato Institute points out, at that salary it’s difficult to see how she can be paying a higher tax rate than Mr. Buffett. Could it be that she’s married to a high-earning spouse?

A typical secretary in the U.S. makes on the order of $30K-$40K a  year. So when people hear Mr. Buffett and President Obama talk about Mr. Buffett’s “secretary”, they naturally think that her income is modest. The title “receptionist” also has been used in Mr. Buffett’s tax rate comparison, and people certainly associate receptionists as people with modest pay as well.

So Messrs. Buffett and Obama are leading Americans to believe that $35K-a-year secretaries and receptionists are paying a higher tax rate than billionaires.

But the effective tax rate on people making that salary is very low; near zero in many cases. Here’s what the left-leaning PolitiFact had to say:

Most secretaries don’t make that much. Salary.com put the average salary for an entry-level secretary at $33,249. The top marginal rate for the secretary would be 15 percent, and then typical deductions and exemptions would reduce the tax burden even more. If the secretary had children and no other income, the likely income tax burden would be zero.

In order for Mr. Buffett’s secretary to pay a higher effective tax rate than him, she would have to be earning on the order of at least $100K to $200K a year. And at that rate, she’s almost in Mr. Obama’s infamous “top 1 percent” – the folks who Obama wants to tax more based on Mr. Buffett’s secretary tale!

Mr. Buffett, you do realize, don’t you, that when you talk about secretaries, the vast majority of Americans think you’re talking about people making on the order of $30K-$40K? They are therefore being misled into believing that Americans of modest incomes are paying higher tax rates than the wealthy.

For example, MoveOn.org made an “I’m Warren Buffett’s Secretary” ad in which someone saying they have three kids and make $40K a year has a higher tax rate than millionaires and billionaires, which is clearly false. (That’s particularly false vis-a-vis millionaires, many of whom pay more income taxes than dividends or capital gains taxes.)

You’re a man of high moral character, and I can’t imagine that you deliberately would want to leave Americans with this misconception. So I recommend that you state exactly how much your secretary earns, his or her exact title, and whether his or her salary is vastly above what typical secretaries in America make.

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Bill Clinton: Don’t Raise Taxes Now

September 21, 2011 by

Even Bill Clinton disagrees with Obama’s desire to raise taxes now. In a Face the Nation interview, he indicated that we shouldn’t raise taxes when the economy is so sluggish. He said to wait “a year or two” for economic growth to return, and then tackle the deficit by raising taxes.

The best plan of action is to not raise taxes at all across the board, or if you’re going to raise taxes, do so by closing loopholes like the mortgage interest deduction (which drives up interest rates and penalizes renters). And close loopholes in exchange for an across the board rate cut, which will help spur economic growth. Economic growth is the biggest generator of tax revenue.

Lest there be any doubt that tacking the deficit is best achieve through spending cuts and not through tax increases, two Harvard economists analyzed 107 separate attempts at fiscal reform in OECD (developed) countries from 1970 to 2007. The goals in each case was to lower debt-to-GDP ratios.

Their study confirmed the obvious: Instances that failed mainly relied on large tax increases and only modest spending decreases, if any.  Instances that succeeded mainly relied on large spending decreases and only modest tax increases, if any.

They also found that instances that relied on spending cuts rather than tax increases are less likely to create recessions.

Obama is setting us up for failure yet again.

The country needs a new CEO. Fast.

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Explaining Econ 101 to a Big Labor Fan

September 6, 2011 by

In a mass-recipient e-mail that I received today from a labor union advocate, the writer lamented that employers don’t pay employers more. I e-mailed him back shedding light on why employers can’t pay their employees more than they or the writer would like.

An employer hired an employee to make widgets. The employer paid her $11 per hour. But he found that the amount he was paying her was more than the revenue he was generating from the widgets. So when she quit, he decided not to hire a replacement, because paying someone to do it would be the same as giving away money. Why not instead give away money to charity? Meantime, the employer just resorted to making the widgets himself.

Why not just charge higher prices to customers in order to cover the salary of an employee and hopefully have a little left over for the employer, one may ask. Well the employer already charges $13 for a widget, and customers already think that’s too high, especially when they want a lot of them. Were he to charge a higher price the customers likely would disappear and his revenues would be even less. (This is based on a real-life experience. Names have been changed to protect the innocent.)

So that’s a microcosm of why employers can’t pay more money to employees than they or labor union advocates would like.

The writer of the e-mail also lamented that welfare benefits aren’t higher. I replied that that would be tough now because the federal government is borrowing over 40 cents of every dollar that it spends, up from a historical average of about 15 cents, pre-Obama. That’s just not sustainable. Raising taxes wouldn’t help much because even confiscating all of the top 1 percent’s earnings would net about a trillion dollars, which wouldn’t even cover a year’s deficit. And a 100 percent tax rate wouldn’t be workable in any event because no one would work if they couldn’t keep any of their earnings. In fact, economists are saying that we’re headed for a 70 percent marginal tax rate (i.e. marginal tax rate is the rate on the additional income you earn, e.g. if you earn $50,000 per year and decide to work a little extra harder to make an extra $1,000, you’d have to pay $700 of that in taxes.) Few people would be willing to work that additional amount, and tax revenues would be way lower than projected, and you’d still be $14 trillion or more in debt.

People are only willing to pay so much in taxes before they either 1) find loopholes to avoid those taxes or 2) refuse to work because the tax rate makes it not worth it to work. So jacking up tax rates won’t result in much additional revenue, if any. And certainly not enough to even make a dent in the deficit and debt. For that, you need to cut spending. A good place to start is to reduce or eliminate the welfare benefits (i.e. government payments to individuals, including entitlements) that go to the upper middle class and rich. Often Republicans try to reform that (“means-testing”), but it always gets shot down by Democrats.

For example, instead of giving rich people Social Security and Medicare money, how about phase out that system so that they finance their retirement and medical benefits out of their own savings – where they’d be mandated to set up a Social Security and/or Medicare savings account during their working lives. (Oh but we can’t have that! That would be “privatization!” – the anti-reformers would howl.)

It’s a tragedy, and a gross injustice, that the Social Security and Medicare contributions of low-income workers are being transferred to middle-class, upper-middle-class, and rich retirees. Instead, the latter should fund their own retirement through their own savings. They tried fixing that a few years ago, but too many people howled “privatization!” so it never got anywhere.

 

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Economics, Not Politics

July 19, 2011 by

Regarding Al Hunt’s article “Politics, Not Economics, Drives Anti-Tax Stand”, as Michael Boskin notes in today’s WSJ, we’re heading toward a 70 percent marginal tax rate.

Hey Al, if you have to give 70 percent of each additional dollar you earn to the government, would you be inclined to work for those extra dollars?

I didn’t think so. Neither would millions of other folks.

That’s economics. Not politics.

Such is what I wrote as a comment to Al Hunt’s article. I received a reply to my comment saying that the top tax rate was 90% under Eisenhower and 70% throughout the 50s and 60s. I replied, “Do you actually believe that people actually worked for dollars that were taxed at 90 percent? No one in their right mind would do so. So they found all kinds of schemes to avoid that tax. Pre-Reagan tax reform, the tax code was filled with lots of loopholes that enabled them to escape a 90 percent tax rate. Either that, or they simply didn’t work for the additional dollars taxed at that rate. Hence the stagnation of the ’70s.

At least that commenter tried to use some logic and maturity in his comment. Another comment I got was more typical of leftists, i.e. just bombast, and devoid of facts. It read, “Your problem is that you blindly believe whatever you read on the WSJ editorial board. Like Murdochs other enterprises, it is a mindless and corrupt GOP marionette doll.”

So I replied to him (or her), “So you don’t think that we’re headed for a 70 percent marginal tax rate? OK, then prove it. Or, for you, wouldn’t a 70 percent tax rate on the rich be desirable? I’d be ecstatic at that prospect, if I were a rich-loathing leftie. Meantime, even for middle-class folks, the effective marginal tax rate is already near 50 percent. And it’s the marginal tax rate (i.e. the amount you’re taxed on each additional dollar you earn) that affects work incentives. Getting taxed so much that it’s not even worth it to work is a terrible thing indeed – even if it happens to the rich.”

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Discourteous, Uncivil, and Wrong

June 11, 2011 by

Here’s a comment I wrote to an article titled, in that most civil of terms, “The Lies and Lunacy in Tim Pawlenty’s Economic Plan”, written by a Mr. Michael Tomasky:

First, if I had to guess, Mr. Tomasky’s parents never adequately taught him basic rules of decency or courtesy, among them that you don’t call people with whom you disagree liars and idiots – repeatedly. To do so means that your own arguments are so weak that you have to resort to ad hominem attacks in order to try to win over those unsophisticated enough to only understand the language of name-calling rather than the language of facts and civility.

Second, an irony is Mr. Tomasky’s own data are false and misleading. Anyone can “back up” one’s point by cherry picking the many think-tank analyses out there and finally settling on one, from a highly partisan source, that seems to echo the thesis that one is trying to make.

And how wrong that analysis is. Instead of relying on a highly partisan think tank, how about pulling data from some less partisan think tanks but that nevertheless still lean left. Observe this chart, presented by the Brookings Institution, Urban Institute – and Obama administration (OMB). It shows that the highest amount of tax revenue the government ever took in was in 2007, at the tail end of the Bush administration, and just before the start of the recession.

Moreover, Obama added more to the national debt in TWO YEARS than Bush did in EIGHT YEARS (and Bush’s contribution to the debt was bad enough as it was) – some $4 trillion. To say tax revenues is the problem rather than spending is, to use a civil term, sheer unreasonableness.



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All (Revenue-Generating) Corporations Pay Taxes

May 10, 2010 by

The other day I heard TV and newspaper commentator Juan Williams complain that half of all corporations don’t pay taxes, a refrain that I’m sure is common among the left.

Sounds ominous, but actually it’s not. A very large percentage of corporations (I don’t have the exact percentage) are S-corps, or Subchapter S corporations, also known as pass-through entities. They don’t pay any corporate taxes at all. Instead, the earnings (if there are any) are passed through to the owner(s), and the owner pays income and/or payroll taxes on those earnings.

C-corporations pay taxes on earnings before they’re passed through to the owner. But lots of those don’t pay corporate taxes because they don’t have earnings – i.e. their expenses exceed their revenues.

And even if S and C corporations don’t pay corporate taxes, if they have employees, they pay a lot of payroll taxes – the employees pay half of the Social Security and Medicare taxes, and the corporation pays the other half. There are tons of other types of taxes they pay as well, such as unemployment taxes and various state and local taxes.

What’s a corporation? A building with lots of office furniture, computers, and equipment inside? Can a building pay a tax? Does a corporation experience consciousness? Can it feel pain? Does it have feelings?

A corporation is another word for a group of people working together. All of those people pay taxes (unless you’re the owner and you’re losing money).

So no, Juan, you’re wrong in your allegation that half of corporations don’t pay taxes. Corporations are groups of people (or even just one person, if it’s a single-member corporation), and assuming all of those people get income from their work, then all corporations pay taxes.

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More Revenue = More Spending

December 7, 2009 by

In the fall of 2008 during the discussion to implement the $700 billion bank bailout, even free-market types assured us the move would be OK because, as happened in Hong Kong, the money would be paid back to the taxpayers.

They were only half right. The money is being paid back, but not to the American taxpayers. Faster-than-expected repayments by banks is giving the government an estimated $200 billion windfall. Instead of using it to reduce our gi-normous deficit, the Obama administration wants to spend it on a “jobs program.”

So the next time there’s a government bailout, assume that it will result in permanent government spending – even on programs unrelated to the original bailout purpose.

Another lesson learned: Whenever the government gets extra revenue, it most likely will spend it rather than reduce the deficit with it. That means raising taxes will result in more government spending.

Another case in point was the SCHIP program during the late 1990s. Extra tax revenue and a smaller deficit prompted the Clinton administration to start a new entitlement program, rather than pay down the debt or cut taxes.

People who think they’re being fiscally responsible, like New York Times economics columnist David Leonhardt, want to raise taxes in order to pay for our unprecedented government spending. But that’s fiscally irresponsible, because once the government gets its hands on any extra tax revenue, it will spend even more.

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Enviros’ Deafening Silence on the Estate Tax

October 22, 2009 by

(A previous version of this article appeared in The Christian Science Monitor.)

The Obama administration aims to prevent the demise of an institution that encourages the destruction of wildlife habitat and open space. And in this legislative battle, the major environmental organizations are nowhere to be found.

At issue is the notoriously perverse incentive that forces people to sell their pristine land to developers: the estate tax.

If you own land, a business, or other high-value assets, when you die the government may take a substantial portion of that for itself, depending on the total dollar amount the assets. In the past, the government would allow one’s heirs to keep up to $600,000 of the assets, and slap a 55 percent tax on anything above that amount. Beginning in 1998 the exemption started to rise with each new year; currently it is $3.5 million.

It is scheduled to be completely phased out in 2010 and then permanently reinstated at the $1 million exemption level in 2011 when the Bush tax cuts are due to expire. Supporters of death-tax repeal are hoping that a zero death tax in 2010 would result in political support for permanent repeal. But if the Obama administration gets its way, those hopes will be dashed.

The administration has proposed not completely phasing it out in 2010 after all, which would quash any political momentum for repeal. Instead, the $3.5 million exemption level would be maintained in 2010 and thereafter. Congress still needs to act on this – expected by the end of 2009.

One of the most sinister effects of the estate tax is the needless loss of millions of acres of farmland, forestland, and wildlife habitat. When a landowner dies, his or her heirs are often shocked to find out that they must pay huge sums to the government within nine months of the death, based on the value of the land. To pay the money, they are typically forced to sell the land – often to developers.

A particular problem is the breakup of contiguous tracks of land, which are necessary for larger animals to forage and roam.

A 2000 study by the U.S. Forest Service’s Southern Research Station found that about 1.3 million acres per year of forestland had to be sold to pay the estate tax, and of the land sold, 29 percent was developed or converted to other uses. And 2.6 million acres of trees are chopped down each year to pay the estate tax. To be sure, those acreage numbers now could be lower because of the gradual phase-out of the estate tax, but in 2011 if the estate tax is reinstated, the numbers will likely shoot up again.

One would think the major environmental organizations would be clamoring for the permanent repeal of the estate tax.

But this is not the case. Most such organizations are silent on the issue. Some, such as Friends of the Earth, even support the estate tax. A spokesperson there told me that heirs would sell their land to developers anyway, even if there were no estate tax.

While some selling still would take place, the question is, would more selling be going on with the estate tax, or without it? It’s the former. After all, the tax gives most families no option but to sell. Without the tax, a large percentage of those families undoubtedly would choose to keep and preserve their land.

The FoE spokesperson also noted, presumably with a straight face (we spoke over the phone), that the estate tax encourages conservation (!) through conservation easements. These are where landowners get some tax relief in exchange for preserving their land. It is certainly plausible that an easement could induce some heirs to preserve their land, who otherwise would have sold it if there were no estate tax. But conservation easements are complex undertakings; most landowners and heirs do not go through the time and expense of setting them up. The result: far more land subject to the estate tax is sold than placed into easements.

In 1998 – the latest year for which I found statistics – the Office of Management and Budget estimated that deductions for conservation easements over the ensuing five years (1999-2003) would reduce estate tax revenue by less than two-tenths of one percentage point (0.18 percent).

Two New York Democratic members of Congress certainly seem to believe the estate tax is taking a toll on the environment. Concerned about dwindling open space on Long Island, Senator Charles Schumer and Congressman Tim Bishop put forward a bill several years ago that would defer the estate tax for those who agree to not sell their land to developers.

I suspect that a big reason for environmental groups’ support for or silence on the issue has to do with other factors. Most employees of and donors to major environmental groups hail from the left side of the political spectrum, where anything that reeks of tax cuts for the rich is anathema. Even for those organizations sympathetic to repealing the estate tax, publicly supporting that could alienate much of their donor base.

R.J. Smith of the Competitive Enterprise Institute said that in the 1970s, environmental organizations began to get captured by the left. Convinced that the source of environmental degradation was a free-market society based on private property rights, young radicals migrated into traditional conservation organizations like the National Audubon Society. He said they eventually took them over and moved their basic philosophy toward a hostility toward free markets.

And slapping huge tax on what a rich person owns when he dies is certainly being hostile to free markets.

The estate tax flap amply demonstrates that the major environmental groups and their donors are redistributionists before they’re environmentalists. If they truly were serious about helping the environment, they wouldn’t let their desire to sock it to the rich get the better of their desire to help the environment.

Patrick Chisholm is editor of PolicyDynamics.

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Punishing the Wealthy Punishes Us All

October 20, 2009 by

(A previous version of this article appeared in The Christian Science Monitor.)

Lest there be any confusion about the overarching philosophy of Barack Obama, his presidential campaign and his policy proposals thus far have cleared that up: income redistribution and penalization of the rich. Though emotionally appealing to many, this philosophy hurts all Americans in the long run.

Pre-presidency, from his remarks on using the Supreme Court to redistribute wealth, to his “spread the wealth” comment to Joe the Plumber, to his plans to cut taxes on all but the top 5 percent of workers, Obama’s strongest and most consistent campaign message was that the rich aren’t taxed enough. His actions – and inactions – as president have borne this out. They include attempts to reduce a tax deduction for charitable contributions by high-income taxpayers, increase various taxes on various industries and on large estates, allow the top two income tax rates rise to 36 and 39.6 percent respectively in 2011 when the Bush tax cuts expire, and lower the already-modest amount of taxes the bottom 50 percent of income earners pay, and increase subsidies to them.

The most alarming proposal is in the latest health care bill, which phases out health benefits as one’s income goes up. When combined with other tax policies, it would amount to an estimated 70 percent marginal tax rate – i.e. for each additional dollar you earn, 70 cents of it is taxed away.

This is a true class warfare-style strategy: punishing the rich and rewarding the non-rich. It would be terrible for our economy and hurt the rich, poor, and middle class alike.

The reason America’s standard of living is high – and why our poor would be considered middle class in the majority of other countries – is because we produce so many goods and services per person. Monetary rewards, and/or a desire to break out of one’s current economic class, are largely what motivate us to produce those goods and services.

Raising taxes on the rich reduces those monetary rewards, which in turn lowers the incentive to work harder or smarter. That’s bad enough. To raise taxes on the rich while reducing them on the middle class – and increasing subsidies to the middle class – reduces that incentive even more.

It’s akin to your boss cutting your pay if you put in longer hours, and raising your pay if you work shorter hours.

Actually, lowering taxes on the middle class and raising them on the rich harms economic growth even more than leaving middle-class tax rates in tact while raising them on the wealthy. It results in a higher marginal tax rate – the tax rate on what you earn above a certain dollar amount. It is marginal tax rates – not overall tax rates – that so affect our incentive to produce. Why put in extra work if the extra income that comes with it is going to be taxed higher?

As the Wall Street Journal noted, “small-business people – and the number of small businesses – live or die by marginal rate changes.”

A study by Martin Feldstein and Daniel Feenberg of the National Bureau of Economic Research found that following the 1993 tax increases, high-income taxpayers reported 8.5 percent less taxable income that year than they would have if their tax rates had not increased. This is largely because, along with shifting compensation from taxable cash to untaxed fringe benefits, people such as the self-employed and senior executives can reduce their taxable earnings by a combination of working fewer hours and taking more vacations – i.e., fewer goods and services produced.

The ill effects of slower economic growth particularly play out over the long term. Europe, with its high marginal tax rates, serves as a good example. In 1973, per-capita income for the United States was about 26 percent higher than that of Germany. After three and a half decades of slower growth in Germany, the gap had widened to 32 percent. The numbers for France are similar.

Per-capita income of Germany and France is about the same as that of our least-wealthy state, Mississippi. A study by Edward Prescott of the Federal Reserve Bank of Minneapolis concludes that Europe’s higher taxes account for almost all the difference in labor force participation rates between Europe and the United States. As taxes have risen over the past three decades, European workers have responded by working less.

There are plenty of other good reasons not to penalize rich people. They are by far the biggest savers. Were it not for their savings, there would be little money available for the rest of us for housing loans, education loans, or car loans. Funds for productive investment by businesses also would be scarce. And most people owe their jobs to a rich person – the owner of the business they work for. (Though many business owners certainly are not rich.)

It’s not as if the rich are undertaxed. According to 2007 figures – the latest year of available data – the top 1 percent of taxpayers pay 40 percent of all individual income taxes. The left lambasted the Bush tax cuts because the top 1 percent’s taxes were reduced along with those of everyone else who pay taxes. Well of course – if you cut taxes on everyone, people paying most of the taxes will be affected.

Barack Obama’s message is loud and clear: penalize the wealthy, and reduce the incentive to become wealthy. That would harm the long-term well-being of Americans of all stripes.

Patrick Chisholm is editor of PolicyDynamics.

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