June 09, 2008

Obama's plan to tax the rich won't work

Businessweek discusses Obama's plan to increase the marginal tax rate back to the level under Bill Clinton and before the Bush tax cuts

Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.

The Bush administration instituted a federal tax cut for all taxpayers. Among other changes, the lowest income tax rate was lowered from 15% to 10%, the 27% rate went to 25%, the 30% rate went to 28%, the 35% rate went to 33%, and the top marginal tax rate went from 39.6% to 35%

Many people believe that increasing the marginal rate will collect more revenue from the the rich or for the government in general. Historically it does not matter if the top marginal rate is 90% or 25% the government collects 19.5% of GDP. The only way to get more tax revenue is to increase GDP. Such as a concerted effort to accelerate a manufacturing and construction revolution using new systems and technology.

Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.

Although Hauser's Law sounds like a restatement of the Laffer Curve (and Mr. Hauser did cite Arthur Laffer in his original article), it has independent validity. Because Mr. Laffer's curve is a theoretical insight, theoreticians find it easy to quibble with. Test cases, where the economy responds to a tax change, always lend themselves to many alternative explanations. Conventional economists, despite immense publicity, have yet to swallow the Laffer Curve. When it is mentioned at all by critics, it is often as an object of scorn.

Because Mr. Hauser's horizontal straight line is a simple fact, it is ultimately far more compelling. It also presents a major opportunity. It seems likely that the tax system could maintain a 19.5% yield with a top bracket even lower than 35%.

The fact that no matter what the rates and brackets all that can be obtained is 19.5% that argues for as simple a tax code as possible for getting that 19.5%.

The fair tax
or a
Relatively flat tax

The wealthier someone is then the more control they can have over their financial profile. Money can be shifted between income, corporate profits, dividends and capital gains and new income can be shifted between jurisdictions.


Tax brackets 1971-1978

1975 Median income 11,800 Mean income 13,779
Someone making 5 times the median income. Would be in the 60k-70k range.
(equal to someone now making 200,000).
Tax rate would be 53-55%.

1965 Median income was $6900 Five times that was 35,000 for 50-53% tax rate.

CBO analysis of long term taxes

Heritage examination of taxes

Comparing some tax burdens between countries

Comparing top marginal individual and corporate tax rates

Historical lessons of lower tax rates

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