Daniel J. Mitchell – If You Want to “Soak the Rich,” Keep Tax Rates Low

I’ve pulled evidence from publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.

US Tax Rates

US Tax Rates (Photo credit: mSeattle)

Dan Mitchell works at Cato, one of my favorite think tanks. And he has long promoted the idea that if you tax something more, you get less of it, and vice versa. Especially vice versa: if you allow people to keep more of what they earn, they’ll earn even more…and pay more in taxes.

Now that’s no reason to reduce tax rates: to get more income to the government. Reducing tax rates should be done for moral reasons: allowing people to keep what they earn.

Mitchell quotes a writer at the Telegraph, a London paper equivalent perhaps to the Post:

During the 1970s, when the tax system specialized in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc.

After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower fuelled a hard-work culture and an entrepreneurial revolution.

This falls into the “Well, duh!” category for me. It’s a brief explanation of the Laffer Curve which Wikipedia explains:

One…result of the Laffer curve is that increasing tax rates beyond a certain point will be counterproductive for raising further tax revenue…

Laffer presented the curve as a pedagogical device to show that…a reduction in tax rates will actually increase government revenues…

The Telegraph article explains what happens when tax rates are increased:

Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas.

The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive.

The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

Ah, but such a move is counter to the prevailing in the administration. Wealth doesn’t belong to individuals, it belongs to the state which, by its grace, allowed such wealth to be created in the first place. So it’s government’s job to redistribute its wealth into the places where, in its infinite hubris, it’ll do the most good.

That’s why we don’t hear much about the Laffer Curve here.

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