Higher Taxes, Lower Revenues

Conservatives have been arguing since, well, forever that the best way to increase revenues to the treasury is to lower tax rates and the best way to reduce revenues is to raise taxes. This may seem counterintuitive, but not only has it happened every time it's been tried there are good reasons why it happens. When people, especially rich people, see their taxes exceed a certain point they simply find ways to avoid paying them.

This is exactly what has recently happened in England. The government raised the tax rates on the rich to 50% a year ago expecting that they'd reap greater revenues, but the opposite happened. Rather than realize the additional £1billion they anticipated they actually lost about £500 million. The Telegraph reports that:

The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50 percent rate. It is the first year following the introduction of the 50 percent rate which had been expected to boost tax revenues from self-assessment by more than £1 billion.

This is why it's simplistic to just talk about taxing the rich. The rich will always find ways to avoid paying and we wind up with less revenue in the bank than if we had not raised taxes.

President Obama has indicated that this is of no concern to him. He wants to raise taxes, not because he thinks it'll help pay for what government needs but because he wants the wealthy to pay more regardless of the results. For him it's a matter of fairness, but this is an absurd exercise in cutting off our fiscal noses just to spite the rich. Even if it produces less income, even if it raises the debt and the deficit, he's determined to make the wealthy pay more because it's "fair."

Thus his recent budget proposal calls for an increase in the dividend tax rate (on families making over $250,000) from 15% to 39.6% and income on capital gains would be taxed at 20% rather than the current 15%.

In April of 2008 in a debate with Hillary Clinton Senator Obama was asked about his wish to double the capital gains rate. The moderator, Charles Gibson, questioned the wisdom of this since raising taxes on the wealthy generates less revenue, to which Mr. Obama replied:

Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

The relevant exchange is in the first 100 seconds of this clip:

The rich must be forced to pay their "fair share," whatever that is (It's never defined). If that means the Treasury winds up with even less revenue, so be it. At least it's fair. Somewhere Karl Marx is applauding.