The Corner

The Folly of Soaking the Rich

The chart Andrew Stiles referred to Friday (from an earlier post by Veronique de Rugy) shows only the start of how counterproductive it is to increase taxes on the wealthy. As a result of lower tax rates on the top income earners, not only do they pay a much larger share of all taxes, but they pay much more taxes total — and revenue to the government has increased. This is because lowering taxes on the rich creates more rich people and richer rich people. The federal government gets much more revenue if you impose a 40 percent tax on a large number of very wealthy millionaires than if you impose a 70 percent tax on a small number of less wealthy millionaires. 

Every tax has a “revenue-maximizing” point well short of 100 percent. If a tax is set higher than its “revenue-maximizing” point, overall tax revenue to the government will decrease. This is the basic theory behind the Laffer Curve, which states that when taxes are zero percent, revenue to the government is (obviously) zero, but when taxes are 100 percent, revenue to the government is also zero, because by taxing all the income of a particular group of people, you kill all economic activity in that group, so you’re left with nothing to tax. Between those two extremes is a curve whereby revenue to the government rises as you increase taxes from zero percent, but begins to fall as you approach 100 percent taxation — that’s the Laffer Curve. 

Arthur Laffer and Ford Scudder explore this phenomenon at length in their brilliant series The Onslaught from the LeftIn keeping with what Veronique pointed out, they write, in Part II of the series:

In the year Ronald Reagan took office (1981) the top 1% of income earners as reflected by the Adjusted Gross Income of all tax filers paid 17.58 % of all federal income taxes. Twenty-five years later, in 2005 the top 1% paid 39.8% of all income taxes, representing a greater than doubling of the share of tax payments made by this group.  

But even more to the point, from 1981 to 2005 the income taxes paid by the top 1% rose from 1.59% of GDP to 2.96% of GDP.  In addition to the huge rise in the percent of GDP paid in income taxes by the top 1% of income earners and the more than doubling of the share of taxes paid by this group was the huge absolute increase in real taxes (2005 dollars using the GDP price deflator [in other words, adjusting for inflation – ML])  from 1981 through 2005.  In 1981 total tax payments from from the richest 1% were $98.84 billion, while in 2005 the top 1% paid $368.13 billion in taxes; that’s a 288% increase in 25 years.  In rough numbers, that means that each of the richest 1% of filers in 1981 paid a little over $100,000 in 2005 dollars, while in 2005 each filer on average paid over $288,000.  And remember that’s inflation-adjusted dollars.”

This astonishing statistic is explained by a simple fact. As a result of reducing taxes on the rich, the rich got much richer — so much so that they wound up paying nearly four times as much total tax (and nearly three times as much tax per rich person) as when taxes were higher.  

This also reveals the truth behind the increased income inequality that liberals love to cite as their chief evidence against supply-side economics. In fact, as Laffer explains in Part I of the Onslaught from the Left series, the poor have gotten richer — just not as quickly as the rich have. “The increasingly unequal distribution of income during the era of supply-side economics has resulted from the poor increasing their income at a rate that has not kept pace with the phenomenal gains in income the rich have experienced — not from the poor getting poorer.” He goes on to show that in fact, lower taxes rates have led both to higher income among the bottom 50 percent of income earners and lower total taxes paid by that group.  

Most important of all, of course, is the fact that when the rich get richer, they invest more money in the economy, thereby stimulating economic growth. Democrats generally can’t stomach the rich getting richer, even when it means everyone is better off. But you’d think they would at least propose tax policy that increases government revenue. Alas, they so want to punish the rich that they are even willing to lower government revenue in the process.  

— Mario Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation, the new    of the Laffer Center for Supply-Side Economics.  

Contributing editor Mario Loyola is senior fellow and Director of the Center for Competitive Federalism at the Wisconsin Institute for Law and Liberty. He began his career in corporate ...

Most Popular

White House

Trump and the ‘Racist Tweets’

What does “racist” even mean anymore? Racism is the headline on President Trump’s Sunday tweets -- the media-Democrat complex assiduously describes them as “racist tweets” as if that were a fact rather than a trope. I don’t think they were racist; I think they were abjectly stupid. Like many ... Read More
White House

The Trump Steamroller

As we settle into high summer and the period of maximum difficulty in finding anything to fill in hours of television news, especially 24/7 news television, two well-established political trends are emerging in this pre-electoral period: The president’s opponents continue to dig themselves into foxholes that ... Read More
Politics & Policy

Ilhan Omar Is Completely Assimilated

Beto O’Rourke, the losing Texas Senate candidate who bootstrapped his way into becoming a losing presidential candidate, had a message for refugees who had come to America: Your new country is a hellhole. The former congressman told a roundtable of refugees and immigrants in Nashville, Tenn., last week: ... Read More
Sports

We All Wanted to Love the Women’s Soccer Team

For the first time in my life, I did not root for an American team. Whatever the sport, I have always rooted American. And if those who called in to my radio show were representative of my audience, many millions of Americans made the same sad choice. It takes a lot for people like me not to root for an ... Read More
U.S.

The ‘Squad’ Gives a Gift to Donald Trump

On Sunday, Donald Trump gave the Democrats a gift -- comments that indicate he thinks native-born congresswomen he detests should “go back” to the countries of their ancestors. On Monday, the four congresswomen handed Trump a gift in return, managing to respond to the president’s insults in some of the most ... Read More