Class Warfare On Steroids

Obama’s main goal in the fiscal cliff negotiations is to impose a class-warfare tax hike, presumably thinking this  will give the government more money to spend.  But,  recent evidence from the United Kingdom suggests that he won’t get nearly as much money as he thinks.

Most governments, including the folks in Washington, assume that tax policy has no impact on the economy. As such, it is relatively easy to measure how much revenue will rise or fall when tax policy is altered. After all, there are only two moving parts – tax rates and tax revenue.

So if tax rates double, revenues climb by 100 percent. If tax rates are reduced by 50 percent, tax revenues drop by one-half.   While this  is a slight over-simplification, but it does capture the basics of conventional revenue estimating. And it also shows why “static scoring” is deeply flawed. In the real world, people respond to incentives. When tax rates rise and fall, people change their behavior.

When tax rates are punitive, for instance, people earn and/or declare less income to the government. And when tax rates are reasonable, by contrast, people earn and/or declare more income to the government. In other words, there are actually three moving parts – tax rates, tax revenue, and taxable income.  Figuring out the relationship of these three variables is known as “dynamic scoring” and it is much more challenging that static scoring, but it is much more likely to give lawmakers correct information.

Why? Because there’s this thing called the Laffer Curve. It shows that it is naive to believe that there is a linear relationship between tax rates and tax revenue. To accurately predict what will happen to revenues when there is a change in tax policy, you also have to estimate what will happen to taxable income.

When you’re trying to stick it to the “rich,” you need to understand that they have tremendous control over the timing, level, and composition of their income. So unlike the rest of us, they can respond very easily when the government goes after them.

The Wall Street Journal opines on what recently happened across the pond.

“A funny thing often happens on the way to soaking the rich: They don’t stick around for the bath.  Take Britain, where Her Majesty’s Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before. That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown’s government introduced in its final days in 2010, up from the previous 40% rate. Lo, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010.  The new tax was meant to raise about £2.5 billion more revenue. . .At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%.”

The United States conducted a similar experiment in the 1980s, except we lowered tax rates instead of raising them. And  we got the same results as the United Kingdom, except in reverse. More rich people, more taxable income, and more tax revenue.

We don’t know the revenue-maximizing point of the Laffer Curve, but Obama seems determined to push tax rates so high that the government collects less revenue.  Not that we should be surprised. During the 2008 campaign, he actually said he would like higher tax rates even if the government collected less revenueThat’s class warfare on steroids, and it definitely belongs on the list of the worst things Obama has ever said.

While politicians may not know the result of or choose to completely  ignore the consequences of  their tax agenda, one thing is certain.  You mess with the Laffer Curve and it will get its revenge.

Source:  Dan Mitchell, an expert on tax reform and supply side tax policy at the Cato Institute

Of course we must not neglect the peasants:  Regardless of whether Obama wins his “class taxfare” against the rich, starting in 2013, 20% of U.S. homes “will see their federal taxes go up by an estimated average of $6,000 to finance [ObamaCare],” writes Fox’s Chris Stirewalt. “In addition to that and the rate hike Obama is seeking in his negotiations, [the President] will need lots and lots more tax revenue to finance his domestic programs…” In other words, this cliff is just the tip of the taxing iceberg.

Even the New York Times sees the writing on the wall–calling the President’s plan “just a starter” to the “$1.6 trillion that Mr. Obama wants to collect over 10 years.”  The full rate hike on the ‘rich’ would have reduced the 2012 deficit to $1.02 trillion from $1.10 trillion. That’s a joke,” writes Charles Krauthammer, “a rounding error.”



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