THE TAX THREAT TO PROSPERITY
January 28, 2008
Missing from recent tax discussions are the huge differences in how the top 1 percent of income earners respond to changes in tax rates versus, say, the bottom 75 percent or 80 percent of taxpayers, says Arthur B. Laffer, president of Laffer Associates.
- Low-income earners have a lot less flexibility to change the form, timing and location of their income -- and the avenues open to them to reduce their tax liabilities are far fewer.
- The avenues open to higher-income and highest-income earners include 401(k)s, IRAs, Keogh plans, itemized deductions, lifetime gifts, charitable gifts, all sorts of deferred income compensation plans, trusts, tax free bonds, etc.
- Moreover, the culture surrounding low income earners is not nearly as focused on tax avoidance as it is in higher income earners.
- Many tax-avoidance methods require expert advice and counsel from people such as tax accountants, lawyers and deferred compensation experts.
- Higher-income people find tax accountants and lawyers and other financial professionals far more cost-effective because the pursuit of tax avoidance is, dollar of income for dollar of income, more profitable at higher tax rates.
- This makes the taxable incomes of those who earn more, more variable, and the taxable incomes of those who earn less, less variable.
In sum, when you cut the highest tax rates on the highest-income earners, government gets more money from them, and when you cut tax rates on the middle and lower income earners, the government gets less money from them. If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years, says Laffer.
Source: Arthur B. Laffer, "The Tax Threat to Prosperity," Wall Street Journal, January 25, 2008.
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