Coveting the Golden Goose
How taxing the rich leaves everyone poorer
Are tax hikes on the way? Some federal lawmakers hope so. “It's a great opportunity to get us some more revenue,” Sen. Charles E. Schumer, New York Democrat, recently said of the upcoming debate over the federal budget.
You know what that means: calls to raise taxes on the rich. Lawmakers can't seem to refrain from eyeing the golden goose.
It seems fair to most Americans that those who earn more should pay more taxes. But how much more?
In a report that drew on 2006 tax data, Heritage Foundation scholar Curtis Dubay showed that a family in the top 20 percent of income-earners pulled in 50 percent more than a family in the next 20 percent, but paid 253 percent more in taxes.
Even more strikingly, a family's income in the top 20 percent income bracket was 122 percent higher than a family in the third 20 percent bracket. Yet it paid a staggering 943 percent more in income taxes.
Are these huge differences justified? Do they help make America a more just society, or is their real purpose to help politicians win votes by redistributing other people's incomes?
One way of making sure the rich pay more is through a proportional tax, also known as a flat tax. With a 10 percent flat tax, for example, someone earning $40,000 would pay $4,000 in taxes, while someone earning $80,000 would pay $8,000.
The United States, however, has a progressive income tax. The tax rate you pay depends on how much you earn. The more you earn, the higher your rate.
The people who pay the highest rates are often unfairly vilified, but they shouldn't be. “In America, 'the rich' are overwhelmingly people – entrepreneurs, small businessmen, corporate executives, doctors, lawyers, etc. – who have gained their higher incomes through intelligence, imagination and hard work,” the late Robert Bork once pointed out.
Depriving these Americans of their hard-earned financial rewards through higher tax rates does not seem particularly moral. Rather, it seems unjust.
The moral argument against progressive taxation is strongly reinforced by the economic argument. As tax rates at the higher end go up, incentives to work, save and invest go down. As a result, fewer new jobs are created. Both rich and poor wind up worse off.
Even small changes in the tax code can have a major impact. For example, shortly after he became New York City's mayor, Rudolph W. Giuliani cut the city's hotel tax from 6 percent to 5 percent. “Within months, net revenue from the hotel tax was actually higher at 5 percent than it had been at 6 percent, since far more visitors were coming to the city,” he later said.
True reform will move us toward a flatter tax code. “Under a flatter tax system, those who pay more income still pay more taxes, but that difference will be more proportional to income,” Mr. Dubay writes. “A code more in line with the flat tax is necessary to remove the barriers that block entrepreneurship and innovation.”
Americans usually oppose attacks on the financially successful because they hope to be financially successful themselves someday. The statistics show they may well be. “Soak the rich” policies often just end up hurting the poor. After all, only people with money can invest and create jobs and opportunities.
“Entrepreneurs must be allowed to retain the wealth they create,” writes George Gilder, author of “Wealth and Poverty,” “because only they, collectively, can possibly know how to invest it productively among the millions of existing businesses and the innumerable visions of new enterprise in the world economy.” Money flows to those who can use it best and create the most value.
If lawmakers are smart, they'll keep this in mind as they move through the budget process. They have a “great opportunity,” all right, for real budget cuts and genuine tax reform. Let's hope they take advantage of it.