Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
A Key Oil Price Trend That Everyone Is Missing - 6th Oct 15
Stock Market Turn Appears to Have Been Made - 6th Oct 15
Designing a Dividend Growth Portfolio for a Specific Retirement Yield Objective - 6th Oct 15
Peter Schiff Predicts Gold Price Breakout - Video - 6th Oct 15
Theresa May Declares War on Immigration - Conference Speech Full Transcript - 6th Oct 15
Is Russia Plotting To Bring Down OPEC? - 6th Oct 15
Target Date Funds As Aid In Retirement Investment Portfolio Design - 6th Oct 15
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15
Redesigning Internet and Facebook to Explore Their Full Potentialities... - 5th Oct 15
Nightshades Curb Your Enthusiasm - 5th Oct 15
U.S. Recession Watch, High-Yield – Rising Defaults - 5th Oct 15
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Taxing the Rich to Cure the Governments Debt Crisis?

Politics / Taxes Nov 04, 2010 - 11:57 AM GMT

By: Robert_Murphy


Best Financial Markets Analysis ArticleThis week's episode of 60 Minutes featured a 13-minute segment on "taxing the rich" in order to cure the government's debt problem. In addition to being an outrageously biased story, the coverage was filled with more economic fallacies than I can address in a single article.

"Progressive" Income-Tax Codes Lead to Volatile Revenues

In the opening moments of the segment, correspondent Lesley Stahl explains that "eight states have increased so-called millionaire income taxes so far as a way of avoiding drastic budget cuts."

Of course, many readers of really mean it when they say theft is wrong, and that a majority cannot justly take an individual's property, even if they plan on doing something nice with it. On this score, raising taxes is wrong for purely ethical reasons. Unfortunately, most Americans don't endorse this way of thinking, and so, in the present article, I'll focus on pragmatic arguments.

In the first place, Stahl had to use the qualifier "so-called millionaire income taxes" because not all of the high surcharges kick in at that level. According to this compilation, only two states — California and Maryland — actually have a bracket for people making at least $1 million. The term in practice simply means a high tax rate for people earning big incomes. For two examples, Connecticut's income tax has three brackets: 3 percent on incomes below $10,000, 5 percent on incomes between $10,000 and $500,000, and 6.5 percent on incomes above $500,000. New Jersey has a similar state-income-tax code, with the first five brackets jumping modestly up through $75,000 in income, but the sixth and highest tax rate kicking in at $500,000.

To be sure, someone making, say, $550,000 per year is not on the verge of starvation. Yet it's not clear that such a person is a "millionaire" either, especially if he is young, has kids, and works in a big city with a high cost of living. The very term "millionaire tax" — which conjures up landed aristocrats who sip martinis on their yachts instead of going to work every day — is misleading.

Beyond the deceptive terminology, the policy of "socking it to the millionaires" actually exacerbates the boom-bust cycle in state-government revenues. As I explain in this policy paper, what are called progressive income-tax codes increase the volatility in revenues. During boom times, people in a state tend to earn higher incomes. But with a progressive (or graduated) tax code, the revenues flowing into state coffers increase more than proportionally. This is because the average taxpayer is earning a higher income and is paying a higher proportion of it in taxes.

On the other hand, revenues tend to crash much harder during recessions in those states that rely on steeply graduated income taxes. Not only are taxpayers in the state earning a lower income, but many of them slip into lower brackets and hence pay a lower percentage as well.

Democratic governments are notoriously short-term in their planning. During the boom times, when state coffers are overflowing with revenues, the state legislatures ramp up spending programs. When the bottom falls out during the next slump, the legislatures are caught in a difficult position. It is no coincidence that California and New York — states with very progressive income-tax codes — also have recurring difficulties in balancing their budgets.

Bill Gates Sr. Needs to Study More American History

At the 4:30 mark of the interview, Stahl explains that Washington State is one of the few without any income tax. Proposal 1098, crushed 2 to 1 at the polls, would have placed a 5 percent tax rate on individuals earning more than $200,000 ($400,000 for couples), and a 9 percent rate on individuals making $500,000 ($1 million for couples). Again, note the rhetorical trick: earlier in the piece, Stahl focused on how many millionaires and billionaires would be hit by the tax. The innocent viewer would be surprised to learn that the tax kicks in at $200,000.

To drive home the point of how modest this piddling tax increase is, Stahl then asks Bill Gates Sr. — a very public proponent of Proposal 1098 — what a couple earning $500,000 would pay. When the father of the software guru explains it would be a mere $5,000 (that's 5 percent of the $100,000 above the $400,000 threshold), Stahl is amazed at the low tax liability.

Washington State voters — unlike Bill Gates Sr. — apparently learned their lesson from American history.

Back when the federal income tax was instituted in 1913, Americans were also promised that it would forevermore remain a slight irritant to the super wealthy. Initially it imposed a mere 1 percent tax on those making under $20,000, and a top rate of 7 percent on those making more than $500,000 — a fantastic sum in those days.

Yet in 1917, a mere four years later, the bottom rate had doubled from 1 percent to 2 percent. Someone in the $500,000 bracket now faced a tax rate of 54 percent. And the highest bracket, applicable to incomes exceeding $2 million, faced a tax rate of 67 percent. (The history of federal income-tax rates is available here.) Needless to say, Americans would not have agreed to a federal income tax in 1913 had they realized what the politicians would do with it.

Spending Cuts Impossible?

In order to demonstrate the "necessity" of massive new taxes on the wealthy, Stahl interviewed former Reagan Office of Management and Budget Director David Stockman, as well as Washington State Governor Chris Gregoire. The message from Stockman was that spending cuts are politically impossible, because neither Republicans nor Democrats have the courage to tell voters no. For her part, Governor Gregoire argued that cutting spending to close her state's deficit would mean heartless cutbacks in crucial services.

In their interview, Stockman and Stahl share a laugh over irresponsible politicians who merely "kick the can down the road" instead of facing tough realities. This is rather ironic, since Stockman's own "solution" is at best a temporary stop-gap measure. The federal debt exploded under the Reagan years not because the government was starved by tax cuts; on the contrary, federal revenues (in nominal dollars) almost doubled during the 1980s.

"It is no coincidence that California and New York — states with very progressive income-tax codes — also have recurring difficulties in balancing their budgets."

Likewise, federal revenues were 25 percent higher when George W. Bush left office than when he was first elected.[1] So what makes Stockman think that DC politicians would suddenly become committed to a perpetual balanced budget — let alone long-term surpluses — now? If Stockman's confiscatory proposals go through, it would merely keep the game afloat for a few more years. With the massive influx of new revenue, the politicians would jack up spending more than they otherwise would.

The only true solution to the federal and state fiscal crises is to cut government spending. Governor Gregoire can pretend that this would return people in her state to the Dark Ages. In reality, the total operating and capital budget for Washington State grew from $53.5 billion in the 2003–2005 budget period to $68.5 billion in the 2007–2009 budget period.[2] That 28 percent growth over a four-year period works out to a growth in spending of 6.4 percent per year. Now some of the increase could be blamed on price inflation, and some on population growth, but even so, Washington State could trim its spending merely by returning to its budget of a few years ago.

People who are concerned about the genuinely needy should keep in mind that government doesn't create resources, it merely takes money from one group and hands it to another. In the process, the government actually makes the total pie smaller, because of the disincentives of taxation. If the government reduced its parasitism on the productive classes, then private charitable giving would increase. And let's be honest — state governments have plenty of ways to cut down on their spending.

Thinking on the Margin

Tax hikes on "the rich," especially at the state level, are not nearly as effective at raising revenue as most people think. High-income earners and businesses really do take into account a state's tax policies when deciding where to locate. It's true, any particular individual might not sell his house and leave just because of a new tax. But on the margin, a new tax will push more people over the edge. (Or, going the other way, a new tax hike will deter people from moving into the state who otherwise would have.)

In the aggregate, with millions of people moving within the United States each year, the effects of differential tax codes add up. To see a particularly striking illustration of this phenomenon in the case of California — which surprised even me as I compiled it — see figure 4 (page 11) of this paper.

In the 60 Minutes piece, Stahl tries to trap one of the representatives of the antitax position. (To repeat, the entire segment is incredibly biased: Stahl lobs softballs to the famous protax people, and paints the two unknown antitax guys as foolish and greedy, respectively.) When the businessman argues that jobs would be lost as some firms relocate to other states, Stahl asks him which states? Since some of his answers involve states with their own income taxes, Stahl thinks she's caught the guy in an absurdity.

Yet this is silly. As the businessman responded, each state has its own competitive advantages and disadvantages. For example, there are plenty of reasons a very productive individual would want to move to California. But one major disadvantage is its top state-income-tax rate of 10.55 percent. People might move to Washington, rather than California, because of this difference. But take that advantage away from Washington, and more people would be inclined to favor California with all of its other perks.

To see how silly Stahl's rhetorical strategy is, suppose Nicholas Cage is reading a part for an action script. He loves it, and tells his agent to jump on it. The producer offers Cage $1 million to play the leading-man role. Cage insists that his agent ask for $2 million.

The agent tries to talk him down, explaining that at such a high price tag, the producer will look elsewhere. "What other actor could they pick?" Cage demands to know. The agent throws out names like Tom Cruise, Brad Pitt, Robert Downey Jr., Will Smith, and Daniel Craig. Cage dismisses this notion as absurd, because after all, some of those actors insist on being paid more than $1 million themselves. Therefore it is inconceivable to Cage that he could lose the part if he insists on more money.

The flaw in Cage's (hypothetical) logic is that he thinks movie producers care only about money. On the contrary, there are all sorts of factors they must consider when picking a leading man for an action role. Not every movie casts the biggest star in Hollywood, because the biggest star commands the highest paycheck. Obviously, some producers opt for actors who will draw in smaller crowds, but they do this to contain their own expenditures.

The situation is analogous when it comes to state income-tax rates. Any particular individual — especially a business owner — decides where to locate for a variety of reasons, including the location of family, love of certain weather, and proximity to cultural activities. But not everyone moves to California or New York. Some people settle for "less cool" places, because of the savings in taxes.


For those who believe in private-property rights, soaking the rich is an immoral policy. But it is also economically counterproductive. The federal and state governments won't solve their fiscal problems until they cut spending. At best, confiscating more from the wealthy will simply postpone the day of reckoning.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2010 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


14 Nov 10, 00:03
taxing the rich

I thought the rich had the IMF, no by golly that's the Treasury Department. "Immoral". Well, personally I feel that the rich should not pay taxes considering how few there are to begin with. Then I wouldn't have to listen to the complaining for my life's 2nd half as I did the 1st.

And seriously, keep your charity.

14 Nov 10, 17:24
you can tax the rich, but noone will

It isnt that hard in the UK. Just take properties over say £1.25m (incl cumulatively) and apply a 3% tax on those households (variable payment methods eg mini mortgage, lump sum, or larger lump sum on death).

That takes care of the deficit and payment comes from those who have done the best from stupid interest rates for doing nothing to earn it.

That way you dont have to raise taxes, you have time to trim spending to new revenue levels and you can focus on supporting small business with special credit unions.

You could even give a deferred tax benefit to those high value home owners as a thank you.

Also prevent residential properties from being put into trust structures, and consider them taxable.

Of course, noone will do this, politicians are hopeless and the rich don't believe in fairness or the good of the whole.

14 Nov 10, 18:05
Taxes destroy productivity.

Its ridicilous to say taxing the rich will solve anything. If you tax someone then they become less productive.

The radical answer is to CUT taxes.

ZERO tax for those on average earnings and no more than 25% for everyone else.

Offcourse the government will never do it because it will mean shrinking the size of the public sector by at least 1/2.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History