NCPA - National Center for Policy Analysis

THE TAX-RATE DILEMMA

August 9, 2007

The political case for pro-growth tax policy, as opposed to redistributionist tax policy, is simple.  Surveys over the last few decades have consistently shown most Americans believe no one should have to pay more than 25 percent of income to the government, says Richard W. Rahn, chairman of the Institute for Global Economic Growth.

The reasons:

  • Most Americans believe it is not fair for the government to take more than one-quarter of anyone's income, and many Americans who are not rich think they may become rich.
  • Most Americans (unlike many Europeans) do not resent rich people; they admire them and want to be one of them.
  • Hence, pro-growth candidates tend to do better at the polls than pro-redistribution candidates.

The economic case for not raising tax rates on the rich is even more compelling, says Rahn:

  • High tax rates can destroy wealth creation, and they won't make the rich pay more.
  • One advantage of being very rich is that you tend to have a choice about the form in which you receive your income, where you earn it, and where you are taxed.
  • Many rich Swedes and Frenchmen have become tax exiles from their own countries; when a rich person leaves, his government gets nothing.
  • When tax rates are perceived to be too high, people tend to choose leisure over work, and consumption over saving and investment, resulting in less revenue for government.

It is politically unacceptable to have an explicitly higher tax rate for middle-income taxpayers than for the truly rich, and economically destructive to have very high rates on the rich.  The only way out of the dilemma is to move to a modest flat rate or consumption tax system, with exemptions or rebates for low income people, says Rahn.

Source: Richard Rahn, "The tax-rate dilemma," Washington Time, August 9, 2007.

 

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