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Who wants to tax a millionaire?

Ryan Williams | Thursday, April 14, 2011

With April 15 just around the corner and all sorts of stories swirling through the news about budgets, deficit-reduction plans and national debt, it seems as though there is a greater than usual interest in the issue of taxation. Given that the United States is currently racking up trillion-dollar deficits like its nobody’s business (compounding a national debt that already totals some $14 trillion) and is facing the prospect of having to drastically increase future spending in order to keep pace with rapidly growing entitlement obligations, it is no surprise to hear some shameless politicians claiming that “it’s time for the wealthy to start paying their fair share in taxes.” Truth be told, there are few phrases in the English language that are more infuriating than this one for a number of reasons.

Comments like this betray a blatant ignorance of simple economic concepts as well as the reality of the American tax system, while simultaneously demonstrating utter disregard for fairness and common sense.

Most observers who believe that wealthy Americans ought to pay more in taxes would probably be surprised to learn that the top 5 percent of individuals in the United States currently pay almost 60 percent of all income taxes, with the top 1 percent of earners supplying 25 percent of all government revenues.

Meanwhile half of all individuals in this country pay no income tax at all. As those who are familiar with the U.S. tax code are well aware, the income of wealthy taxpayers above a certain threshold is subject to a higher marginal rate of taxation (currently 35 percent), one that President Obama and Democratic leaders in Congress would very much like to raise. The entire American tax system is predicated on this belief, that wealthier individuals should have to pay a higher percentage of their income in taxes in order to support programs that benefit the less fortunate. This policy needs to change immediately. Not only is the concept of unequal tax rates egregiously unjust, it also spits in the face of common sense and reason. The system as it stands now currently penalizes success and rewards failure — in essence saying that the more productive you are, the more will be taken from you, while the less you contribute, the more will be given to you. How can we continue to justify a system that promotes laziness and freeloading?

Progressive Democrats and their allies on the far left have also recently begun touting increased taxes on the wealthy as a way to help close the budget deficit and start paying down the national debt. Unfortunately, like so many other economic plans put forth by Democrats recently, this one runs afoul of facts and reality. Currently, income earned by individuals in excess of $373,651 is taxed at a rate of 35 percent, the highest marginal rate. President Obama and Democrats in Congress want to raise this rate to at least 39.6 percent, where it stood while President Clinton was in office.

However, even if income above that threshold were taxed at a rate of 100 percent, meaning that everything earned by an individual in excess of $373,651 would be collected as tax, still that would only pay for about half of the federal government’s projected budget deficit for next year. So taxing the wealthy into submission is not going to solve the nation’s fiscal problems — there just isn’t enough money out there in the hands of those few individuals.

While Democrats will undoubtedly try to raise taxes anyway, regardless of the ineffectiveness of the policy, there is an inherent danger to this approach. There is a theory in economics known as Hauser’s Law, which observes that no matter what the top marginal tax rate has been in the United States, total government revenues have always equaled about 19.5 percent of gross domestic product. President Obama and many other Democrats would like Americans to believe that raising income taxes on the wealthy will generate more revenue that can then be “redistributed.” However, as this law demonstrates, raising taxes on the wealthy will not actually increase government revenues, because the higher tax rates will be offset by decreases in productivity, innovation and growth. The only time government tax revenues will actually increase is when there is first a corresponding rise in GDP. The real question then ought to be how can we best go about increasing gross domestic product? Ask any economist and they will tell you that the answer most certainly is not imposing oppressive rates of taxation, particularly on the wealthy, who are most responsible for job creation. The answer instead will be cutting tax rates across the board, which will in turn inspire increased consumer spending and higher rates of economic growth.

None of the positions staked out in this column are very popular in the U.S. today, and they are even rarer among policy makers in Washington. Very few people are willing to stand up and acknowledge the reality that tax rates for the wealthy are simply too high and are offensive to any reasonable standard of justice. And who can blame them? No one wants to be seen (even if incorrectly) as greedy or selfish, especially in these difficult economic times.

But the fact remains that raising taxes on the wealthy will only be counterproductive and will further perpetuate and exacerbate the current system of inequality. In fact, slow economic growth is likely to be the least of this nation’s problems, as wealthy Americans are more likely to finally call it quits if attempts to raise their taxes yet again are successful. Why should they continue to live and work in a country that constantly requests more and more of them, to pay for benefits, welfare and handouts that freeloading Americans demand but refuse to pay for? One day they are just going to leave, and it doesn’t take a Ph.D. in economics to realize how bad that would be for the rest of us.

Ryan Williams is a sophomore. He can be reached at twilli15@nd.edu

The views expressed in this column are those of the author and not necessarily those of The Observer.