The Corner

Taxing the Rich

In order to fund her “deficit neutral” health-care reform, Nancy Pelosi is trying to make the millionaire tax a new feature of our federal tax code.

Here is the plan:

The bill is funded largely from a 5.4 percent tax on individuals making more than $500,000 a year and couples making more than $1 million, starting in 2011. The tax increase would hit only 0.3 percent of tax filers, raising $460.5 billion over the next 10 years, according to congressional estimates.

Obviously, I think it really doesn’t make it okay to impose this tax just because only 0.3 of taxpayers will be hit by it. Besides, since the tax isn’t indexed to inflation, sooner than later it is going to make its way to many more taxpayers’ bills than planned today (Remember the AMT).

Taxing the rich

Obviously, the president is unlikely to have any problem with such a tax. From the moment he took office, he made it clear that he had nothing but disdain for high-income earners. His first budget message, for instance, made it sound as if rich people never do anything to deserve the money they make. Really? Check out this list of the 400 richest americans. It’s mainly made of super-producers and not the rich, lucky bonbon-eaters that the president seems to have in mind.

Once again, I am stunned to see that lawmakers are just assuming they can tax away the highly productive members of our society without any consequences. Little thought is given to the economic consequences of such a tax. In a 2006 paper, Martin Feldstein at Harvard calculated that the elasticity of taxable income with respect to income tax rates is about 1, so that cutting the top rate from 40 percent to 30 percent would boost taxable income by about 16 percent. Why? Probably because when taxes go down we see an increase in work effort and less tax avoidance by entrepreneurs, doctors, scientists, and others top income earners. That, of course, greatly benefits the rest of us.

Well, the reverse is true, too.

Also, consider the following data: 43 percent of American households do not pay any federal income tax. On the other hand, the top one-fifth of households pay 69 percent of the entire costs of the federal government.

I know what I am talking about: In France, high-income and wealth taxes have led to a brain drain and a wealth drain (think about rock star Johnny Halliday, top model and French Marianne Laeticia Casta, French tennis players, and the thousands of French tech wizards who populate Silicon Valley).

So, rather than raising top income tax rates, the U.S. should be cutting taxes if it doesn’t want to become France.