Why taxes don’t work, and why higher tax rates won’t support the entitlement state

Breitbart.com, May 2012, American Enterprise Institute

Arthur Brooks describes why increasing taxes won’t help facilitate economic growth. The three main reasons, he argues, are (1) there’s no evidence such increases have helped other countries (or in the past), (2) tax hikes on small population segments don’t raise significant amounts of revenue, and (3) the targeted tax rate group happens to be small businesses. Obama likely knows this, so why the push? In a word: “fairness.”

As far back as the 2008 presidential primaries, Obama said he’d be willing to raise capital gains taxes — even if it lost revenue — in the interest of “fairness.” In his famous speech in Osawatomie, Kan., last year, employed the term “fair” or “fairness” some 14 times in his arguments to raise taxes. He has spent months demanding that “millionaires and billionaires … pay their fair share.” Meanwhile, just a few days ago on the Today show, billionaire investor Buffett — a major proponent of his namesake tax proposal –argued that tax hikes on the rich would “have a great effect in terms of the morale of the middle class.”

In other words, taxes are an issue of “fairness,” not economics, to these gentlemen. And they see raising taxes on the wealthy as a good in itself. President Obama’s use of the term denotes equalizing economic outcomes more than at present — that is the nature of defending redistributive taxation as fair, per se. But this is not in line with the way most Americans understand true fairness.

Michael Barone argues in his recent Washington Examiner column, that higher tax rates won’t support the entitlement state.  If the current programs limp along without reform, no amount of tax increases will fund them.  The primary reason for this is because people who make the most money (the famed “1%”) don’t actually make enough money.  

Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.

The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.

That’s just because tax rates are too low, Obama backers reply. Just raise the rates on high earners and the problem will be solved.

Actually, high earners don’t make enough money to close the current budget deficit. You’d need to raise taxes on middle-income earners too.

But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates — like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s — have never produced federal receipts higher than 20 percent of GDP.

Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.