Get More Income by Soaking the Rich?

At the moment, Obama and the Democrats seem to be hanging tough on demanding that tax rates on high earners be increased.

This in spite of the fact that the president’s own commission (Simpson/Bowles) recommended reducing top tax rates, and gaining revenue by closing loopholes.

But the notion that higher rates will produce more revenue is just grossly simplistic. Some evidence comes from the United Kingdom.

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.

George Osborne, the Chancellor, announced in the Budget earlier this year that the 50p top rate will be reduced to 45p from next April.

Since the announcement, the number of people declaring annual incomes of more than £1 million has risen to 10,000.

However, the number of million-pound earners is still far below the level recorded even at the height of the recession and financial crisis.

Last night, Harriet Baldwin, the Conservative MP who uncovered the latest figures, said: “Labour’s ideological tax hike led to a tax cull of millionaires.

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

“Labour now needs to admit that their policies resulted in millionaires paying less tax and come clean about whether they would reintroduce this failed policy if they were in power.”

A less journalistic analysis of the effect of the high tax rates reaches generally the same conclusion.

• The 50 per cent additional rate of income tax was introduced on 6 April 2010. It was the first increase in the highest rate of tax in the UK for over 30 years, and was expected to yield around £2.5 billion. However, because of the uncertainty regarding how those affected would respond, and its impact on the economy, the yield estimates were highly uncertain.
• This report provides the first comprehensive ex-post assessment of the additional rate yield using a range of evidence including the 2010-11 Self Assessment returns. The analysis shows that there was a considerable behavioural response to the rate change, including a substantial amount of forestalling: around £16 billion to £18 billion of income is estimated to have been brought forward to 2009-10 to avoid the introduction of the additional rate of tax.
• The modelling suggests the underlying behavioural response was greater than estimated previously in Budget 2009 and in March Budget 2010, decreasing the pre-behavioural yield by at least 83 per cent. This result is also consistent with that contained in the Mirrlees review, and suggests the additional rate is a highly distortionary form of taxation.

Bottom line: the increase in the tax rate distorted people’s behavior, causing them to arrange to reap income when the tax rate was lower, and had a major disincentive effect, causing people do things (work less, retreat to tax shelters) that reduced the yield by 83 percent compared to a “static scoring” (one that assumes that people faced with a higher tax rate act exactly as they would if faced with a lower rate).

But the truth is, the demand for higher tax rates has nothing to do with raising revenue.

It’s an attack on the social class that can earn high incomes in markets. And it is mounted not by the poor, but by the New Class: people such as academics, journalists, political activists and government bureaucrats who prosper as government grows.

Since their orientation is not toward producing for the market, and their incomes are lower than those who are similiarly qualified and educated and do produce for the market, they resent people who earn, in markets, higher incomes than they do.

So they demonize them (“vulture capitalists”) and try to seize their income. But the point is not really to seize their income and put it to uses the New Class prefers. It is much more simply to level down a rival social class.

How Socialism Has Harmed Europe

From the Wall Street Journal:

“Jobs and economic growth” will be the focus at today’s crisis summit in Brussels, but judging by recent meetings European leaders will address the financial symptoms rather than the causes of their economic woes. For insight into the latter, they might do well to read a report on Europe published last week by the World Bank, of all unlikely places.

The study’s lead authors, World Bank economists Indermit Gill and Martin Raiser, conclude that the Continent’s basic growth model of the last half-century is seriously amiss, and that it will take more than well-meaning summitry to fix it.

Some of the news in the report is good. Europe, despite its woes, still accounts for one-third of world GDP with only one-tenth of world population. Before the financial crisis, half of the world’s $15 trillion in trade in goods and services involved Europe. Within the Continent, the single market has created a boom in cross-border trade and investment, raising the incomes of millions of Southern and Eastern Europeans over the last few decades.

As for the bad news, the first source of trouble is the labor market. European workers aren’t nearly as productive as they ought to be, especially in the South. Labor participation is low, and those who are employed are working less than they used to. In the 1970s, the French worked the longest hours among advanced economies. By 2000, they worked a month and a half less than Americans each year.

Europe’s demographics also aren’t on the side of growth. Populations across the developed world are graying, but Europe’s low productivity growth means that its future labor shortfall will be especially acute. It doesn’t help that Europeans draw social security benefits earlier and more easily than their developed-world peers. Pension commitments will strain national budgets even if Angela Merkel gets her way on handcuffing euro-zone public debt.

Which brings Messrs. Gill and Raiser to the other serious drain on European growth. Big government, by their calculation, shaves about two percentage points off growth once public spending passes 40% of GDP. Some welfare states are better-run than others—think Sweden and Germany—but the World Bank report highlights a few important connections between the welfare state and growth.

Today, European governments spend more on social protection than the rest of the world combined, thereby entrenching powerful disincentives to work and enterprise. Social protections have also come at huge direct cost to taxpayers. Europe’s giant debts arose because of “public spending to protect societies from the rougher facets of private enterprise,” the authors write. It’s rare to hear an institution such as the World Bank that is typically sympathetic to its political bosses put the matter so clearly.

A few policy fixes suggest themselves. Labor is still not as mobile within the EU as once envisioned. Easing restrictions on immigration from outside the EU is highly controversial, but it would help Europe face its demographic and economic shortfalls. Wealthy European countries have suffered a net drain of 1.5 million highly educated people to the U.S. alone in the last few decades.

But something deeper that needs adjustment. “From North Americans,” the authors write, “Europe could learn that economic liberty and social security have to be balanced with care: nations that sacrifice too much economic freedom for social security can end up with neither, impairing both enterprise and government.”

Messrs. Gill and Raiser call Europe a “lifestyle superpower”: It attracts tourists in droves, and its residents enjoy peace and a high standard of living. But it’s not getting richer. Unless it again puts income growth ahead of income security and redistribution, the Continent will continue to decline as an economic power.

The Perverted Culture of the European Welfare State

From the Associated Press:

MARSEILLE, France (AP) — Battling for benefits is a tradition in the Gilly family, passed from generation to generation — as it is for families across the country. And that goes some way toward explaining why the protests against plans to raise France’s retirement age have shown such determination and ferocity.

For Gilly and many other Frenchmen and women, social benefits such as long vacations, state-subsidized health care and early retirement are more than just luxuries: They’re seen as a birthright — an essential part of the identity of today’s France.

The protest against a government plan to raise the retirement age to 62 has special meaning for five members of the Eric Gilly clan who are demonstrating in the streets of Marseille.

“We want to stop working at 60 because it’s something our parents, our grandparents and even our great-grandparents fought for,” says Gilly, 50, a union representative at Saint-Pierre Cemetery, the largest in this bustling Mediterranean port city.

“And over the years ... you can see that we’re losing everything they fought for. And that’s unacceptable.”

In Marseille, strikes to protest President Nicolas Sarkozy’s planned retirement reform have shut down docks, left tons of garbage putrefying on sidewalks and drawn tens of thousands into the streets for each of six protest marches since early September.

Gilly, with huge drums strapped over his shoulders, led the parade for the Workers’ Force union Monday. His sister, two daughters and a nephew weren’t far behind.

“Unionism, it’s in the skin,” Gilly said in an interview with Associated Press Television News. “It’s more than a passion. When something is wrong or things aren’t right, they have to be changed.”

Retirement benefits are coveted, by some, perhaps even more than a higher salary, making the issue particularly sensitive. Sarkozy’s plan to raise the retirement age hits a nerve deep in the French psyche.

Just savor, for a minute, how absurd this is. The French are proud of not working.

They demand more and more benefits. But of course, they have to pay for those benefits.

The origin of the European welfare state was socialist politicians appealing to the working class, telling them (in effect) “vote us into power, and we will take money from the rich and give it to you.” The whole edifice, in other words, was built on the selfishness of socialist politicians and low income workers.

But of course, soon enough the bill has to be paid by ordinary workers. But the old notion that you can just make demands on government and get goodies for free persists.

The fundamental problem is that the culture of Europe is not rooted in capitalism, but in feudalism — as political scientist Louis Hartz famously insisted.

For peasants, bettering yourself by working harder just wasn’t possible. You only became better off by being given something — by the Lord of the Manor, or by the King, or by the parliament. It’s a culture of dependency, not of work, responsibility and achievement. It’s a backward culture, and part of the greatness of America is that we have resisted it.