Fiscal Cliffs and Tax Hikes

The talk of a “fiscal cliff” is all over the news these days. Whatever partisan affiliation you have, I’d like to take a moment of your time to explain what happens when taxes are raised on wealthy people.

Anti-Government Response

Robert Winnett of The Telegraph recently wrote on the massive drop of people making more than £1,000,000 GBP. In Great Britain’s 2009-10 tax year, more than 16,000 people claimed incomes of over £1 million. However, in the following year, that number dropped to 6,000 people. What gives?

Just before his general election loss to current Prime Minister David Cameron, former Prime Minister Gordon Brown introduced a 50% tax rate for the wealthy. The Conservative party believes that the policy incentivized a large number of people to either move their funds elsewhere—or incentivized the people themselves to move abroad.

Pro-Government Outcome

So did the UK government benefit from this tax increase? Probably not. Winnett notes that it actually cost the UK £7 billion in lost tax revenue. And by “cost,” he means this: “The government did not take in as much money as it could or would have,” or: “The government spent money it thought it would come in, but didn’t.” The stark reality is that an increase in taxes actually leads to less revenue.

Deflating the Myth

There is a popular myth associated with certain economic beliefs, which goes something like this: “If we raise taxes on the wealthy, then they will pay more money.” As the example with the wealthy in the UK has shown, this isn’t always the case. We have factual reasons for thinking this is false, but let’s consider the presupposition behind the myth.

What makes someone think that we ought to raise taxes on the wealthy? Have people who have a lot of money done anything wrong? Or does it just seem easier to take their money because they have more of it? I think often times people believe it is the latter option; rich people have more money to help the government programs continue. But simply because someone has more money does not justify public officials taking a disproportionate amount of money from them.

Finally, why think that government workers could spend the money better than the wealthy people themselves? These individuals are often entrepreneurs and large job creators. Are the wealthy hiding money under their couches and mattresses? No. Their money is often either in a bank account or in investments. Money in the bank means that banks can give out loans to other people seeking to better their situation (home loans or loans to start businesses, for example). Investments allow entrepreneurs to at least try to create more jobs for the economy. So what reasons are there for thinking that rich people are not spending their money well?

While the “fiscal cliff” talks continue, we should reconsider how politicians on both sides of the aisle speak of taxing the rich, and we should carefully evaluate whether or not those ideas have merit.

  • This assumes these “taxes on the wealthy” are actually about revenue –I’m pretty convinced they aren’t. I’ve become convinced these are being seen as “punishment” against “the wealthy” for “messing the system up so much” in the last decade –that people think “the wealthy” have gotten wealthy on the backs of the poor, and it’s time for them to pay more, no matter whether or not their paying more actually brings more revenue into the government.

    So, from the CBO’s perspective (with their static model), increasing taxes always increases revenue –clearly this is a lie, but it’s a lie that’s essential to rationalizing the increase in tax rates. The motivation, however, is more envy than it is raising revenue. For those who are “poor,” to “stick it to the rich, especially those rich folks in business!” For those in government, the incentive is different, but worse –to reduce the number of people wealthy enough to actively oppose the policies of the leadership.

    Overall, what we’re seeing isn’t about revenue, it’s about envy and anger.

    It’s a short walk from envy to tyranny –but many people seem to think that so long as they’re not on the receiving end of the tyranny, the tyranny itself isn’t all that important.

  • Anonymous
    Hi Russ, thanks for your comment. Perhaps you are right. It seems had to judge the motivation of someone, but the stats don’t lie: raising taxes on the wealthy is not going to solve the debt problem. What Uncle Sam has is a spending problem.

  • They’ll probably trhust a VAT on us, but they’ll forget to remove the income tax Hey, let’s just do both Technology and efficiency is constantly putting people out of work, and we keep adding more workers to the work force. In good times, maybe all those surplus workers can become musicians, sell Avon, or become merry maids. But with government screwing things up, higher unemployment/underemployment might progress.Manufacturing of ipods or anything is becoming more and more mechanized it sure seems it will get rougher for the average worker. The good thing is a nice standard of living can be had for not much money. But managing distribution or redistribution of wealth/jobs might make for some angst. Maybe competition would bring more services to more people merry maids and child care for more commoners ? Better care for the elderly? To some degree we’ve already had this problem, with government and unions providing cushy lifetime employment, often for those that might have more trouble competing in the open market. Perhaps a working welfare program would be needed, but they should make less than the privater sector, not much more with early retirement and lifetime super benefits.A vibrant middle class might keep a whole economy humming, but constant trillion dollar stumbles by big government keeps crippling the capitalist/socialist mix we have now.
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