Vail Daily letter: Tax rates and revenue
December 12, 2012
The Laffer curve illustrates a valid point – that at a certain level, tax rate hikes become counterproductive, since people respond to increases by acting in ways that reduce revenue.
For example, they can move away. The Aug. 7 London Daily Mail reported on the plans of numerous wealthy persons to move out of France, after the Socialist government of Francois Hollande proposed increasing the top income tax rate to 75 percent.
Thomas Sowell has pointed out that the same thing happened in the UK in 2009, when the maximum rate was raised to 50 percent. According to the Wall St Journal on Dec. 3 of this year, the number of millionaire tax filers in the UK went from 16,000 in 2009-2010 down to 6,000 in 2010-2011. There was a corresponding decrease in revenues received from the millionaires who were left. Now there is talk of lowering the maximum rate, in hopes of getting more revenue.
It’s even happened here. New York state, Illinois and California are experiencing outflows of wealthy taxpayers and businesses, in large part because their state tax burdens keep getting higher.
There are other ways people react to tax increases. Recently, Costco declared a large dividend, payable before the end of this year, attributed to the looming increase in the tax rate on dividends in 2013. Costco isn’t the only firm doing this; but it was interesting because one of its principals, Jim Sinegal, is a prominent supporter of President Obama.
Why be surprised at such behavior? If you were wealthy, would you just apply the tax rates to all your income, and write a check for the result? Or would you try to avoid paying any more than you have to?
The wealthy can afford accountants, lawyers and others to help them minimize the effects of higher tax rates. The wealthy have influence in the halls of Congress, where all those loopholes and gimmicks are crafted, to soften the effect of high tax rates. And remember – the bills from those helpers are deductible expenses on their tax returns.
It isn’t necessary to like the wealthy. But they do serve useful purposes when treated fairly. If you keep putting more of a load on Atlas’s shoulders, eventually, he will shrug.