Monday, November 29, 2010

More pie for everyone

W. Kurt Hauser:
The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). . . .

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

This isn't all that surprising. If you tax something -- including productivity -- you get less of it. The best policy, then, is to keep tax rates low. This stimulates the economy, which increases employment and GDP. The government will continue to take its 19% of the pie, except now it's a bigger pie. Everybody wins.

The Left doesn't understand this. They think pies only come in one size, so if one person doesn't have enough pie, we must steal pie from someone else and "spread the wealth around." The thought that we can make more pie and give everyone a bigger piece doesn't make sense to them.
The target of the Obama tax hike is the top 2% of taxpayers, but the burden of the tax is likely to fall on the remaining 98%. The top 2% of income earners do not live in a vacuum. Our economy and society are interwoven. Employees and employers, providers and users, consumers and savers and investors are all interdependent. The wealthy have the highest propensity to save and invest. The wealthy also run the lion's share of small businesses. Most small business owners pay taxes at the personal income tax rate. Small businesses have created two-thirds of all new jobs during the past four decades and virtually all of the net new jobs from the early 1980s through the end of 2007, the beginning of the past recession.

In other words, the Obama tax increases are targeted at those who are largely responsible for capital formation. Capital formation is the life blood for job creation. As jobs are created, more people pay income, Social Security and Medicare taxes. As the economy grows, corporate income tax receipts grow. Rising corporate profits provide an underpinning to the stock market, so capital gain and dividend tax collections increase. A pro-growth, low marginal personal tax rate stimulates capital formation and GDP, which triggers a higher level of tax receipts for the other sources of government revenue.

The economy is an organism. You can't starve an arm or a leg without starving the whole system. A tax on one is a tax on all. Obama isn't "spreading the wealth"; he's limiting the wealth. What he needs to do is get out of the way and let the wealth grow. Then the free market will take care of spreading it around.

HT: TaxProf Blog

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