Monday, September 20, 2010

Reynolds Fisks Federal Revenue Claims

Alan Reynolds, a CATO fellow writing at NRO, offers an effective utilitarian rebuttal to the government's claim that raising taxes on the top 2% would bring in an additional $34 billion in Federal revenue.

Set aside for now that the money belongs to its owners and it's immoral for the Feds to confiscate it. Set aside that utilitarian arguments are not the way to argue about taxes, since they assume social utility is the proper justification for taxation. The analysis is still valuable. An excerpt proves the point:
If anyone could really believe the proposed tax hikes could possibly have no harmful effects on the economy, the $34 billion revenue estimate would still be wildly optimistic.


Because it also assumes high-income taxpayers make no effort to avoid the added burden. In economic jargon that means assuming an “elasticity of taxable income” of zero, although recent studies put the actual elasticity closer to one.

Evidence from past changes in the highest tax rates suggests affected taxpayers will be able to conceal almost enough incremental income (above the $250,000 threshold) to offset the steep surtaxes tax on such income, leaving even the IRS no better off.
More investors would maximize contributions to tax-favored savings plans, or switch to tax-exempt bonds.

The academic evidence is especially clear that a higher tax rate on dividends would dampen investors’ appetite for dividend-paying stocks, and that a higher tax rate on capital gains would reduce the frequency with which investors sell assets and therefore have to pay the tax.
Mr. Reynolds, though, is silent on an even more important point: he assumes Obama believes, or even cares much, whether the $34 billion will be gained or lost.

For the radical egalitarian Obama, taking money from 'the rich' isn't motivated by the need to reduce the deficit. Reynolds points out that it would cover all of nine days, as no doubt Obama either knows or waves away. (The figure is puzzling anyway, since the deficit is larger than $306 billion per annum, but never mind that now.)

No, Obama's decisions here flow from his warped view of "fairness." He said so long before the election and that hasn't changed. The rest is just political rhetoric to accomplish that goal.

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