Arthur Laffer will argue against the motion: Be it resolved tax the rich (more) at the Munk Debates in Toronto on May 30. Watch it live at 7 p.m. ET.
Please just consider the following: Since, but not including, 1913, every single major U.S. tax rate increase on the highest income earners has reduced total tax revenues from the highest income earners as a share of GDP and has caused slower growth or recessions, including the Great Depression.
Every single major tax rate reduction on the highest income earners since the income tax was adopted has increased total tax revenues from that group as a share of GDP and has led to economic expansion and prosperity.
During the boom period from 1980 to 2007, tax revenues as a share of GDP from the top 1 per cent of income earners went from 1.6 per cent to 3.1 per cent. Tax rates on the highest income earners fell dramatically during this period.
A government can’t expect more and better jobs when tax rates on the single most important group of job creators – high income earners – are increased. It doesn’t make any sense. The U.K. learned these lessons painfully since Prime Minister Cameron took office. The tax rate on the highest income earners was raised to 50 per cent from 40 per cent; Britain experienced a double dip recession and tax revenues went down.
None of this should surprise you. Higher income people can hire lawyers, accountants and lobbyists, which other people cannot afford. Also, high income earners can change the location of their incomes, the timing of their incomes, the composition of their incomes and the volume of their incomes. Other people quite simply can’t do this. In other words, high income earners have both the ways and the means to control what they pay in taxes.
Canada has weathered the recent Great Recession better than most countries by not raising tax rates or engaging in excessive deficit-financed stimulus spending. The loonie is now worth more than a U.S. dollar. Reagan, Kennedy and Clinton achieved economic prosperity, in part, by tax cuts and spending restraint while Nixon, Carter and Obama have done just the opposite with opposite results. As seen by my examples, no single party has a monopoly on good economics, and ignorance is also bipartisan.
But the worst consequence of high tax rates on the nation’s most successful is the proliferation of hypocrisy, cheating and misuse of the IRS. Whether something is legal or not has replaced whether something is right or wrong. Trust, simplicity and fair treatment create an aura of voluntary compliance, which is essential to the well-functioning of a country’s tax code.
Take the current poster boy for higher upper tax bracket rates, Warren Buffet. In his public call for higher tax rates on his rich friends, Mr. Buffett stated in a letter to The New York Times that he paid a 17.4-per-cent tax rate with taxes paid of a little under $7-million on an adjusted gross income of a little under $40-million. While this is a large sum, it actually understates Mr. Buffett’s true income in 2010 by more than 250-fold. Properly defined income is what you spend plus what you give away plus your increase in wealth.
If you include the increase in Mr. Buffett’s untaxed unrealized capital gains of $10-billion over that year and his untaxed $1.6-billion gift to the Bill and Melinda Gates Foundation, Mr. Buffett’s 2010 income was actually more than $11.6-billion, meaning his true effective tax rate was only 6/100ths of 1 per cent as opposed to 17.4 per cent. A low rate, broad-based tax of 12 per cent on all incomes would have collected $1.4-billion in taxes from Warren Buffett instead of $7-million. Now that’s what I call fair.
Please remember that an economy can’t be taxed into prosperity nor can a poor person spend himself into wealth.
Arthur Laffer is a founding father of supply-side economics, and key economic adviser to former U.S. president Ronald Reagan.