Higher Taxes for the Rich Don’t Increase Revenue
Any “tax the rich” discussion is controversial and usually mired in politics. But most tax the-rich discourse – either yea or nay – conforms to beliefs rather than facts. And unsupported opinions, no matter how eloquently or ardently expressed, will not alter a longstanding truth: increasing tax rates for the wealthy does not increase tax revenue.
TED Talks, a site devoted to airing provocative speeches, recently banned as “too political” comments by a wealthy American who said there’s no good reason for people like him to get preferential tax treatment.
Job Creation Myth
Nick Hanauer, a multimillionaire venture capitalist, told attendees at a TEDUniversity conference that the often-quoted reason for giving tax breaks to the rich – they create jobs for the middle class – is a myth.
“When business people take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around,” said Hanauer, according to a script of his banned speech published May 16 in the National Journal.
“Anyone who’s ever run a business knows that hiring more people is a capitalist’s course of last resort, something we do only when increasing customer demand requires it,” said Haunauer, the first non-family investor in Amazon.com.
Tax rates should reflect the role that the middle class plays in job creation, Hanauer said. “Taxing the rich to pay for investments that benefit all is a great benefit for both the middle class and the rich.”
‘Banned’ Speech a Marketing Ploy?
Hanauer was an invited guest at TEDUniversity and his remarks shouldn’t have come as a surprise to anyone – he expressed similar sentiments in a Business Week article in December. So the controversy may be one of TED’s making – a “banned” speech is inherently more appealing than one freely aired. The media, including publications such as Time have delighted in “leaking” Hanauer’s speech.
In any case, Hanauer’s argument is without merit. Maybe business people don’t create jobs, but raising the taxes of the wealthy won’t benefit the middle class, reduce the federal budget deficit or produce any fact-based advantage to anyone. (Except for politicians whose voting constituency favors higher tax rates for rich people.)
Fact vs. Philosophy
Sentiment and philosophy do not trump fact. And here’s the one incontrovertible truth about taxes. Higher tax rates for the rich do not add revenue to the federal budget.
For the past 65 years, tax revenues have averaged slightly more than 19 percent of Gross Domestic Product – GDP — no matter what the tax rates were. Raising or cutting taxes for persons in the top 2 percent of income has never changed the fact that revenue from taxes has never netted much more or less than 19 percent of GDP, according to W. Kurt Hauser, chairman emeritus of the Hoover institution at Stanford University.
In 1952, tax rates for top income earners equaled 92 percent of their income – the highest rate in history. At the other extreme, tax rates for high earners fell to 28 percent between 1988 and 1990. But the difference in tax rates did not increase or decrease overall tax revenue – the 19 percent figure held true no matter what tax rates were imposed on rich people, Hauser wrote in an article for the Wall Street Journal.
Raise GDP, Not Tax Rates
Alan Reynolds, a senior fellow at the Cato Institute, adds that individual income taxes have also held steady – at about 8 percent – “regardless of top tax rates on salaries, small business and investors.” The only reliable way to raise federal revenues, Reynolds, says, is to raise GDP.
If you believe it’s morally fair to tax wealthy persons at higher rates than those in the middle class, fine. If you believe all people should be taxed equally, no matter what their income, that’s okay, too. Both arguments are reasonable and with merit. But if you think higher tax rates for the wealthy will improve the economy, 60 years of research proves you wrong.
Smoke and Mirrors
Increasing the tax rate on rich individuals will not create additional tax dollars that will help the government reduce debt.
The rich will do what they’ve always done – find ways to avoid paying taxes. They’ll find new ways to shelter their income in the U.S. or they’ll more their wealth outside the country.
Increasing tax rates will not solve the debt problem. It would merely create an illusion of a solution. And it will take more than a magician’s trick to make the country’s escalating national debt disappear.