Michael Barone does a pretty fair job of explaining why anybody who thinks that we can right our fiscal ship of state solely by increasing the taxes on the incomes of the rich are sure to be disappointed:
That’s wrong as a matter of simple arithmetic, as is clear from a chart reproduced on the Wall Street Journal editorial page showing the total amounts of taxable income of each group.
The chart showed that if the government had simply confiscated every dollar from those reporting more than $1 million taxable income in 2008, it would not have gotten the $1.3 trillion needed to close the current federal budget deficit.
What the chart doesn’t show, however, is even more important. And that is that when you reduce income tax rates, high earners have more taxable income. When you raise them, they have less.
High earners don’t sit around waiting to have their money confiscated any more than chickens sit around and let you pluck out all their feathers. They pursue other options.
This is most obvious when you think about capital gains. The federal government doesn’t try to tax capital gains — the increase in values of your stocks or your house — every year (professor Bittker had us in knots explaining how it might do this). You pay capital gains on a stock or house only in the year you sell it.
What happens if the capital gains tax goes up from 15 percent to 50 percent? People stop selling stocks and hold on to their houses if they possibly can. And when cap gains rates go down? They’re more willing to sell, pay the lower tax and invest in something else.
That’s why the government’s total revenues from capital gains have tended to rise when the capital gains tax rate is lowered. And why increases in the capital gains tax rate never raises the amount of revenues static models estimate it will.
Don’t misconstrue my pointing to this as a belief on my part that I support extending the Bush tax cuts (I don’t care whether they’re the Bush tax cuts or the Obama tax rates), that I think the government doesn’t need to increase the revenue it produces, or that tax cuts always pay for themselves. As I have said repeatedly year I think it’s practically and politically necessary to balance the budget by a combination of increasing revenues and cutting expenses. The most likely source of increased revenue is from high income earners. Like Willie Sutton I know that you’ve got to go where the money is. And, similarly, cuts must come from where most of the money is being spent: Social Security, defense, and healthcare. The reason we’ve got to do these things however unpleasant or even disastrous we find them is to tamp down a fast-increasing non-discretionary spending item: interest on the debt.
I’m happy to provide my own answer to the question that Mr. Barone asks at the beginning of his column: income is what you report on your 1040.
However, the great debate on taxes is not what the rates should be but how you determine income. Taxing the income of the well-to-do, as suggested above, is risky. They can adjust their incomes in ways that those who depend mostly on W2 income can’t. By the way is there some straightforward way of determining total aggregate W2 wages year by year? I’ve looked and have found the numbers terribly difficult to come by.
If the class warriors were really serious, we’d be hearing more about taxing wealth (did you know that France has a wealth tax?) rather than taxing income. Funny how all those millionaires in both parties in the Senate never seem to raise the subject. If they did I’m sure the screams would be heard from here to Reykjavik.