Taxing Rich Ignores Underlying Problems

February 21, 2013

In the context of the political debate that surrounds America's fiscal crisis, Democrats often propose raising tax rates on the wealthy to increase revenue. This strategy is mistaken, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

  • In the short-term, tax increases might provide much needed revenue without damaging the economy, but in the long-term there are effects of tax increases that proponents ignore or do not comprehend.
  • President Barack Obama has proposed raising taxes on couples making more than $250,000 and singles making more than $200,000, which represents the top 2 percent of taxpayers.
  • Warren Buffet famously said that tax rates for those making more than $500,000 should be increased and that the rich will continue to invest and make money regardless of the tax rate.

Economists are unsure of how people's behavior changes when taxes are increased. If taxes don't influence behavior, higher taxes at least discourage people from becoming wealthy through entrepreneurship and career choices.

  • Some literature suggests that, regardless of tax rates, individuals will work the same hours to earn the same income to support their families and the lifestyle to which they are accustomed.
  • Other literature suggests that people work more hours when marginal tax rates are lower, a phenomenon that is readily identifiable as the difference between Americans who work more hours than Europeans who have higher tax rates.
  • Studies have also shown that women are more responsive to tax rate changes.

Increasing tax rates may raise short-term revenue, but in the long-term it will keep people from entering the top earning brackets by disincentivizing hard work. Raising taxes is a politically expedient way to raise revenues without dealing with the major financial challenges facing the United States. The simple fact is that there are not enough rich people to pay for America's current spending habits.

Source: Veronique de Rugy, "Soaking the Rich," Reason Magazine, March 2013.

 

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