Tax Stupidity

There are a lot of people calling for raising taxes. Tom Coburn (a Republican, it should be noted) is in favor of increasing tax revenue by raising nominal rates on the wealthy. Daniel Berger thinks it’s unfair that the rich (himself excepted, of course) don’t pay their fair share. These two stories, then, reveal the two main arguments for increase tax rates on the wealthy: increasing revenue and making society fairer. Unfortunately, these two arguments have nothing to do with reality.

It’s surprising that anyone seriously thinks that raising relatively high tax rates to an even higher level will automatically lead to higher revenues. Britain tried this last year by raising the top income rate on millionaire earners to 50% and saw a £7 billion decrease in tax revenue. California attempted to create the highest state income tax in the nation and saw its revenue fall as well. Furthermore, federal tax revenues actually increased after the Bush tax cuts. Clearly, the argument that increasing revenue is as simple as raising tax rates is demonstrably false.*

What’s interesting, though, is that a progressive tax system doesn’t actually alleviate unfairness (aka inequality). California and New York, for example, have two of the most progressive tax codes, relative to other states. They also have a surprising amount of income inequality, relative to other states. Of course, correlation is not causation. But the absence of correlation should certainly indicate the absence of causality (since the theory is that progressive tax rates reduce income inequality, the complete absence of this theory in practice should lead to the conclusion that this theory is complete and utter bunk).

Why it is the case that progressive tax rates don’t lead to greater income equality is difficult to discern. Perhaps it is the case that, in response to increased taxes, the moderately wealthy leave while the uber-wealthy stay. Perhaps there is a connection between progressive tax rates and expansive regulation, with said regulation tending to benefit the wealthy. Perhaps the progressive tax system is a mirage of nominally tax rates coupled with lots and lots of loopholes. Perhaps God hates progressive and loves nothing more than a good joke at their expense. Perhaps the elite exploit progressive naiveté for gain. Whatever the case may be, it appears that it’s time to refrain from arguing that progressive tax rates make things fair.

At any rate, it should be clear that the two main reasons for increasing nominal tax rates are nothing more than crap. Raising rates doesn’t increase revenue, nor does it make things more fair. Now, let’s stop pretending that it does.

* Of course, this doesn’t mean that decreasing tax rates necessarily leads to a revenue increase. The Laffer curve suggests that there is a revenue-optimal tax rate between 0% and 100%. Where this specific point is for federal revenue is unknown, but history suggests that revenue will not generally exceed 20% of GDP, and that optimal tax rates generally tend to be below 50%. My personal opinion is that, assuming a highly simplified tax code (one or two collection points and few to zero loopholes), the optimal tax rate will be in the low to mid twenty percent range.

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