Tax Increases Are Futile

January 29, 2013

Following the recent fiscal cliff deal and the wider discourse of equitable taxes, many Americans believe that tax increases on the wealthiest Americans are an appropriate policy response to the fiscal crisis. However, there are several problems with increasing tax rates for those making $250,000 or more, says D.W. MacKenzie, an assistant professor of economics at Carroll College in Helena, Montana.

  • When taxes are raised, many wealthier Americans will renegotiate their wages and salaries with their employers. When upper-income workers receive more pay, they shift the tax burden to the employer, who then incurs higher labor costs. Because of the higher labor costs, employers raise the prices of goods and services, which effectively passes the tax increase from the high-income employee through the employer to all consumers.
  • When taxes are raised, many individuals take measures to avoid paying taxes by simply leaving the country. Genard Depardieu did this recently to escape France's 75 percent tax rate, just as many notable Britons including Ringo Starr, Roger Moore, Phil Collins, Pink Flloyd, Sting and Sean Connery left the United Kingdom as tax exiles in the 1980s when Britain raised its highest income tax rate to 83 percent. Many may view leaving the country as too drastic a measure but will instead work fewer hours, use tax loopholes or retire earlier to avoid paying higher taxes.
  • Any increase in the tax rate will be unlikely to put a dent in America's enormous debt. The official national debt is nearing $17 trillion dollars; however the present value of the real long-term debt -- which includes the cost of unfunded entitlements, federal pensions and veterans' benefits -- totals an estimated $220 trillion.

Overall, any attempts to make the rich pay their fair share will not make much difference in the grand economic scheme. Tax rate hikes will be passed along from higher-income earners to employers and consumers. Any additional revenue that is actually raised by a tax rate increase will do little to change the effects of out-of-control spending.

Government waste must be eliminated and spending reined in instead of raising everyone's taxes.

Source: D.W. MacKenzie, "The Futility of Tax Increases," Foundation for Economic Education, January 21, 2013.

 

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