Tax The Rich...Why Not?

Tax the rich and things will be better for everyone. That's not an argument. It's a statement you'll be hearing more and more in the coming months.

The Federal government and many state governments are looking to raise taxes on "the rich." Why? Because they want/need to raise more money. The recession has caused tax revenue to go down. Budget cuts are painful. They need more revenue in order to minimize budget cuts. The argument gains emotional impact when groups such as the poor, the elderly and other "disadvantaged" members of our society are shown to be suffering inordinately because of the recession. Presumably, the additional revenue needed will be funneled to help the disadvantaged.

Some politicians, mostly Republicans, argue that picking on the rich is unfair. They claim that higher taxes on those earning more money comes down to penalizing success. Not only is it unfair, but the higher tax becomes a disincentive to work hard. If the rich won't work hard, they won't earn as much and tax revenues will fall.

The argument sounds like it makes sense. But I haven't seen any proof that raising taxes on those who earn more acts as a disincentive to work hard - and that, because they aren't working as hard, the rich are paying less taxes. The argument may have merit as a matter of fairness. But if you can't show that tax revenues fall as a result of the rich not working as hard because they lack the incentive due to the higher taxes they will pay, then you can't show that the higher taxes on the rich will result in less revenue to the government.

On the other hand, many Democrats argue that, it's a matter of getting more money from those who can most afford it. They feel it's fair to tax those who have more in order to benefit those who have less. They claim that this is a legitimate function of good government.

But, again, I haven't seen any specific proof that raising taxes specifically on the rich results in increased taxes sufficiently to help all these suffering classes of people the Democrats presumably want to help. I'm not talking about how it would do so theoretically. I'm talking about proof that it has ever worked in the past. (This doesn't mean such proof doesn't exist. Just that I haven't seen it, and that I haven't seen anyone produce any proof to support their argument that taxes should be raised on the rich today.)

Caroline Baum of Bloomberg recently contacted Arthur Laffer to discuss the matter. Laffer is known as the creator of the Laffer curve which illustrates the relationship between tax rates and tax revenues. He claims to have data that shows that raising taxes on the rich will not increase tax revenues. Basically, the argument goes that the rich have the means to hire accountants and attorneys who will find ways to legitimately avoid taxes. Another thing the rich can do is move their businesses to locations where they will not pay the higher taxes.

Apparently, studies show that in years when tax brackets were highest, the top 1% of taxpayers paid a lower percent of total tax revenue. When tax brackets were lowered, as they were during the recent Bush administration, the top 1% of taxpayers paid a higher percent of total tax revenue.

So you have to ask yourself: if the objective is to raise more revenue, will raising the tax bracket on "the rich" result in more revenue? Not theoretically...really. It would certainly help if the argument could be backed up by data, just as Mr Laffer has apparently been able to back up his assertion that raising taxes on the rich will result in less taxes to the government.

Forget about the politics. Forget, for the moment, the argument regarding fairness. If the objective is to raise more money for the government from the rich in order to provide benefits for the less rich, then there should be some way to demonstrate that raising taxes on the rich is the way to accomplish that. Is asking for proof asking too much?

Unfortunately, these sorts of tax bills seem to be pushed in an emotionally charged atmosphere. Those wanting to tax the rich tend to use envy to rile people up. But anytime you resort to using a vice - in this case envy - to get your way, nothing good can come from it. Using envy to get legislation passed is no better than people using money - bribes - to get favors from government officials, or anyone else for that matter.

Just make the effort to prove your case. Prove your case and get the legislation passed. Prove that taxing the rich will increase revenue and prove that the increased revenue will be used to help others who are less fortunate. Has anyone seen this proof? I know I haven't.

While I hope the honest effort will be made to prove the case, I know it probably won't. Worse, I think envy will be the trump card the "tax the rich" folks will use. That's bad. Using vice won't bring about good results. I know that as surely as I know that vice won't ever become virtue.

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