Friday, March 12, 2010

Raising Tax Rates Can Raise or Lower Revenues

You don't have to be a devotee of Arthur Laffer to see that raising tax rates may lead to lower revenues. The Wall Street Journal has a great story today on the story of Maryland. Maryland dramatically raised "taxes on the rich" and all of a sudden there were far fewer rich folks filing tax returns. The drop off was astounding. There were 30 percent fewer milionaire tax returns filed in 2008 than in 2007 after Maryland raised the tax rates on the highest earner. For those who think this is just a product of the financial crash, try this data point on for size: one of every eight milionaire taxpayers filing Maryland returns in 2007 filed no return at all in 2008 in Maryland. Guess what! They moved.

Rich folks can either move (out of the US if necessary) or they can simply hold their wealth in a form that taxing authorities cannot reach. If they want, they can simply borrow to support their lifestyle. The folks that get trapped in the tax system are the middle class whose income comes predominantly from w-2s. They can't escape.

It is completely hypocritical for Warren Buffett and Bill Gates to urge higher taxes on the rich. They know full well that they will never pay those higher rates and that sooner or later the "soak the rich" tax argument is enabling to a spending policy that is completely out of control. At the end of the day, the middle class will be left to pick up that tab, as they always are.

The rich don't really care what the tax rates are. They don't pay those rates anyway.