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.

Socialism: The Peasant Mentality

From Victor Davis Hanson:

Traditional peasant societies believe in only a limited good. The more your neighbor earns, the less someone else gets. Profits are seen as a sort of theft. They must be either hidden or redistributed. Envy rather than admiration of success reigns.

In contrast, Western civilization began with a very different ancient Greek idea of an autonomous citizen, not an indentured serf or subsistence peasant. The small, independent landowner — if left to his own talents and if his success was protected by, and from, government — would create new sources of wealth for everyone. The resulting greater bounty for the poor soon trumped their old jealousy of the better off.

Citizens of ancient Greece and Italy soon proved more prosperous and free than either the tribal folk to the north and west, or the imperial subjects to the south and east. The success of later Western civilization in general, and America in particular, is testament to this legacy of the freedom of the individual in the widest political and economic sense.

We seem to be forgetting that lately — though Mao Zedong’s redistributive failures in China, or present-day bankrupt Greece, should warn us about what happens when government tries to enforce an equality of result rather than of opportunity.

Even after the failure of statism at the end of the Cold War, the disasters of socialism in Venezuela and Cuba, and the recent financial meltdowns in the European Union, for some reason America is returning to a peasant mentality of a limited good that redistributes wealth rather than creates it. Candidate Obama’s “spread the wealth” slip to Joe the Plumber simply was upgraded to President Obama’s “I do think at a certain point you’ve made enough money.”

The more his administration castigates insurers, businesses and doctors; raises taxes on the upper income brackets; and creates more regulations, the more those who create wealth are sitting out, neither hiring nor lending. The result is that traditional self-interested profit-makers are locking up trillions of dollars in unspent cash rather than using it to take risks and either lose money due to new red tape or see much of their profit largely confiscated through higher taxes.

No wonder that in such a climate of fear and suspicion, unemployment remains near 10 percent. Deficits chronically exceed $1 trillion per annum. And now the poverty rate has hit a historic high. We are all getting poorer in hopes that a few don’t get richer.

That limited-good mind-set expects that businesses will agree that they now make enough money and so have no need to pursue any more profits at the expense of others. Therefore, they will gladly still hire the unemployed and buy new equipment — as they pay higher health care or income taxes to a government that knows far better how to redistribute their income to the more needy or deserving.

This peasant approach to commerce also assumes that businesses either cannot understand administration signals or can do nothing about them. So who cares that in the Chrysler bankruptcy settlement, quite arbitrarily the government put the unions in front of the legally entitled lenders?

Health insurers should not mind that Health and Human Services Secretary Kathleen Sebelius just warned them to keep their profits down and their mouths shut — or face exclusion from health care markets.

I suppose that no corporation should worry that the government arbitrarily announced — without benefit a law or court ruling — that it wanted BP to put up $20 billion in cleanup costs for the Gulf spill.

What optimistic Americans used to call a rising tide that lifts all boats is now once again derided as trickle-down economics. In other words, a newly peasant-minded America is willing to become collectively poorer so that some will not become wealthier.

The present economy suggests that it is surely getting its wish.

Hanson’s point is consistent with the thinking of famous political theorist Louis Hartz, who in a book called The Liberal Tradition in America (“liberal” as in free markets and free people) observed that socialism in Europe did not grow out of capitalism. It rather grew out of the feudal past of the continent. It was simply the peasant mentality applied to modern industrial society.

Of course, the lust for redistribution in the U.S. today does not come from the poor, and certainly not from the working class. It comes from the New Class — people in government, academia, the media and activist groups who use redistribution as a tool to attack a rival elite, the business class.

It is not, in other words, the project of people who value equality, but rather the project of a new elite, an elite perfectly personified by the Obama Administration.

Trick or Trick

Democrats and Redistribution

From Scrappleface.

Obama, Clinton Redistribute Campaign Cash to Poor Rivals

by Scott Ott

(2007-07-02) — Senators Barack Obama, D-IL, and Hillary Clinton, D-NY, today turned presidential campaigning on its head when they announced that the combined $52 million in primary campaign cash they raised in the second quarter would be redistributed to less fortunate candidates like Delaware Sen. Joe Biden, Alaska Sen. Mike Gravel, and Ohio Rep. Dennis Kucinich.

In a joint news release, Senators Obama and Clinton said, “The fundamental principles of the Democrat party say that the rich and powerful have an obligation to help the poor and downtrodden.”

Former North Carolina Sen. John Edwards, not slated to benefit from the redistribution, denounced the move as a “crass political ploy which lacks the weight of traditional Democrat moral leadership, because it was voluntary.”

“If Hillary and Barry really believed in our Democrat principles,” Mr. Edwards said, “they wouldn’t voluntarily give their money to a few poor candidates…money which was voluntarily given to them. Instead, they would introduce legislation to mandate that all presidential candidates be given an equal amount of taxpayer dollars. This could be done without raising taxes on anyone but the filthy rich, and by shifting money from the Pentagon’s quagmire budget to this new program.”