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Monday, February 1, 2010

$1 Trillion Obama Will Never See

Raising tax rates on high income earners is the key to the Obama way, both during the campaign and in his latest budget and tax proposals. Taxing the wealthy, or rather, taxing those making over $250k a year, is the gospel according to Obama.

Obama is raising taxes on people making over $250k by over $1 trillion (yes, with a "t") over ten years.

Those with the power to tax never learn from history. I've written about the "revolt of the kulaks" phenomenon in which the producers of society would rather not produce than be subjected to confiscatory taxation. A related phenomenon is tax avoidance, in which people structure their lives so as so avoid creating taxable income (for example, purchasing municipal bonds rather than corporate bonds).

Whether it is a revolt of the kulaks, or mere tax avoidance, there is economic distortion from high rates of taxation.

The British are seeing this effect in their current budget, as wealthy Brits engage in tax avoidance (structuring their financial lives so as to legally avoid taxes) in anticipation of a rise from a 40% to a 50% rate:

High earners will cost the public purse hundreds of millions of pounds through tax dodges as they avoid the new 50p rate of income tax, a minister indicated yesterday.

Lord Myners, the City Minister, said that the Treasury had “significantly reduced” its estimate of the revenue to be earned from the historic change.

He said that he believed that the new top rate, due to come into force this April, would still generate extra income from the wealthiest 2 per cent of the national workforce. But he cast doubt on whether the Treasury would pocket the £1.13 billion it has earmarked for 2010, and the £2.5 billion it hopes to raise in 2011. “We still believe it will be beneficial,” he said.

Lord Myners told peers that “behavioural consequences of the new higher rate of taxation” — shorthand for tax avoidance — had forced the Treasury to lower its expectations.

Guaranteed future headline: "Obama administration surprised at lower than expected revenues from taxes on the wealthy."

They never learn, do they?

Related Posts:
All. Fall. Down.
The Revolt of the Kulaks Has Begun
The "Richest 5%" Are The New Kulaks

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  1. It's not just avoidance -- the avoidance has follow-on effects, as does the tax itself.

    Rich people use their money to make more, by investing in profit-making enterprises which employ people. The schemes for avoidance all have in common a lesser return paid for by either promotion of some do-good intention, or being purely financial manipulation, or both. Less investment in profit-making enterprises yields less business expansion, lower employment, and less tax collected from other parts of the economy.

    Also, rich people spend their money, which results in income and consequent tax paid for waiters and concierges and hotel maids and people who bolt fenders onto Rolls-Royces and Jaguars.

    The combination of the two, plus emigration to tax havens, lowers the general economic level and consequently lowers tax revenues.

    Sheesh. They've already done that once, and should be able to cite chapter and verse from the pre-Thatcher era. The second time as farce...


  2. I hope that the pundits will stop referring to Keynesian economics once this goes through.

    From what I understand Lord Keynes suggested that taxes should be higher during a time of war, and lower during times of peace. The higher taxes were for paying for the cost of weaponry.

    Due to the incompetence of Labour the Welfare State in the UK is bulging at the seams. Raising taxes on the top 1% of taxpayers is not going to remedy that situation. The same is true in the USA.

    The raising of T(axes) has the effect of decreasing I(investment) which in turn has the effect of decreasing Employment (N).

    The larger the share of G(overnment) as a part of GDP, the worse off is the economy in the long run.

    A 10% increase in Tax in the UK is sheer lunacy.

    What can one expect from Socialists? They are simply not bright enough to work it out.

  3. You would think that in the face of a populist uprising Obama would get it. His bloated budget and self agrandizing attack on the rich should spell his doom. At least if voters are paying attention.

  4. I guess the people of this country will realize that they have been had when everyone is subject to a 60% tax and not just the "rich"

  5. I'm sure that it will be a disaster to restore the tax rate to what it was a decade ago when the country had low unemployment, a growing economy and a budget surplus; but in any event you should be blaming George Bush and the Republican congress who passed tax cuts with expiratation dates.

  6. Just a small note re: tax avoidance.
    'Tax avoidance' is not paying tax that you should legally pay.
    'Tax minimization' is using legal structures to reduce the amount of tax payable.
    Of course there is always the argument that people should pay their 'fair share' of tax and live by the spirit of the law. Just remember that you get prosecuted according to the letter of the law, not the spirit.

  7. We can't tax our way out of this mountain of debt, in any case. In the end, this is a moral, not a political, question. We have to make choices, and learn to do with less.

    See "Living within our means: the government":


  8. Maggie, don't forget going from 40% to 50% tax is a 25% increase in the rate!

    "A 10% increase in Tax in the UK is sheer lunacy."

  9. Nobody likes to be taxed. But for all the economist posting, like all the faux war generals who knew so much about how to engage in an unwinnable war, how are we suppose to pay for unfunded wars , previous tax cuts and entitlements? Also I agree with Quacker about the sloppy term 'tax avoidance'. That sounds a lot like tax cheating.

  10. Which media outlet would actually print or display the headline you propose?

    I'm inclined to think only Fox might do so.

  11. The only way Bush could get the tax cuts passed was to give them a sunset becaused they used the dreaded reconcilliation process to pass them. Thats why the 10 year expiration.

  12. Anybody catch the article in the Timesonline about rise of tax on rich to %50 with attendant expected reaction to the injured parties. We need to find where they plan to move and to follow them there.

  13. Actually, Clark, you've touched on something I've been advocating for some time: Let's shrink the Federal government back to the size it was under Clinton -- after all, just about everyone, Democrat and Republican, would agree that we were far better off economically in 2000 than we are at present.

    Just look what would happen if we did that:

    If we returned to Clinton-level spending, Federal spending would be $1.789 trillion/yr -- that's what was spent during Clinton's last full year in office, 2000. Tax collections have fallen drastically during this recession, but are still estimated for 2010 to be $2.165 trillion -- meaning that we could, right now, be running a budget SURPLUS of $376 billion per year.

    So I'm with you on the spending side. Let's shrink the government back to what it was in the year 2000 and freeze all spending at that level. As far as taxes are concerned, you see it is not necessary to increase tax rates back to what they were in 2000. We can leave them at current levels and use the surplus to pay down the outrageous national debt.

    Of course, to do this, we are going to have to find a whole new type of politician. Certainly, no mainstream Democrat or Republican politician has the wherewithal at present to accomplish this kind of spending cut.

    Almost all of them -- both parties!! -- are of the opposite mind-set, i.e. that government must always and forever expand. A cut in government spending, they believe, will only make the recession worse. But how has the drastic expansion in spending under first Bush and now Obama made anything better? Has it “stimulated” economic growth? No. It’s gotten us into a terrible mess! So let’s try the opposite!

    All the spending and tax collection numbers quoted above are available here:


    Just go to that link and download Table 1.1.

  14. Clark,

    Yes, we know. And tax rates for "the rich" were higher under Eisenhower, too. Much higher, up to 90%.

    The difference is, under those circumstances you guys had not yet managed to completely stifle capital formation. A "Progressive" is a person who believes that (a) everybody should have a good job at high pay, (b) anybody who has the wherewithal to provide good jobs is a criminal to be punished by taking the money away. You are then astonished by unemployment. "Unanticipated!"


  15. My people, I have two pieces of wonderful news.
    First, I am giving you all free healthcare, by taxing the rich.
    Secondly, you are all now rich.

  16. Governments are fond of "sin taxes" to modify social behavior. Want to discourage smoking - raise the tax on tobacco. Want to discourage drinking - raise the tax on alcohol.

    Want to discourage success... you guessed it- raise the tax on success.

  17. I think when this is all over Keynes reputation is just going to be a bit more kindling on the pyre of mankind's really bad ideas. Throwing good money after bad is hardly an economic philosophy destined for success. Nor is creating artificial bubbles and then trying desperately to re-inflate them when they burst. I blame it on poor parenting. Apparently no one read the proper bedtime stories to these people. For instance, the UK politicians seem totally unaware of the fable about the goose that lays the golden eggs.

    And to Clark, my memory is that Bush wanted the cuts to be permanent, as any decent person would, but the Dems blocked him. The Republicans were weak kneed in that case just as they were in most others which is the reason they lost Congress. Socialism-lite is hardly a winning brand in anyone's eyes, left or right.

    In the US we have recently been treated to the spectacle of everyone hoping their sick relatives kick the bucket before the death tax rises back up to confiscatory levels. My father would have never worked so hard and created the jobs he did had he been able to foresee the tax burden my mother would be forced to bear before passing on the wealth he had stored away for the next generation. As it was, even at the time of his death, the money had to be put in less productive areas to shield it from the highwaymen who have found less morally legitimate employment with the government these days. At least when crooks are free-lancers they have a highly enough developed conscience to understand that what they do for a living is wrong.

  18. Corrected future headline - "Tax Revenues Unexpectedly Fall Short"

  19. @Quacker - "tax avoidance" means the use of lawful means to lower taxes owed; "tax evasion" is the term for use of unlawful means.

  20. Thank you professor. I was about to make the same point.

    Never knew that a Public Finance eco class would be so useful almost 30 years later.

    It's also important to note the difference in the multiplier effect of money in the private sector vs once it is confiscated by the government. That has a huge impact on actual GDP available for any taxation.

  21. I am a huge fan of a VAT tax system, but only if we scrap scrap the current system of taxing income, wages and capital. A VAT system that taxes consumption will have all the right incentives and disincentives in place to optimize economic growth.

    If incomes and wages were not taxed, people would have every incentive to earn as much as possible tax free. That provides a huge incentive for people to work and maximize earnings, and no incentive to avoid earnings to avoid taxes.

    Similarly, with no taxes on capital and a penalty on consumption, we'd see a big jump in the savings rate and capital formation. Investment would flow freely where it can earn the best return.

    Taxing consumption would provide a huge disincentive for people to take on debt and live beyond their means. That would lead to a conservation of scarce resources, keep commodity prices low, and make the environmentalists happy (or less angry).

    The bottom 50% of earners pay very little income tax. They need to have skin in the game so they don't vote in politicians who are about redistributing wealth from producers to the poor. A consumption tax would apply to everybody, which makes it fair. The most basic essentials like food might be exempted, but everything else is fair game.

    Instead, what we're probably eventually going to get is a VAT IN ADDITION TO our current income tax based system, which will be our death knell. We won't get the benefits of the VAT and still have all the perverse disincentives of the income and capital tax system.

    Supply siders like Jack Kemp, Bruce Bartlett and Art Laffer researched and considered a VAT tax vs. tinkering with marginal income and capital gains tax rates during the early Reagan years. I wonder what the economy would look like today had they decided to go the VAT tax route instead of the supply side route.

  22. Not only do they not learn, but they expect the same result the next time they raise the rates. FDR ran it up to 90% and was still surprised that the economy was mire in depression.

  23. Call it tax avoidance... Seems to work for all of those who are working at 1600 Pennsylvania Avenue. So, why not us little people?

    I am thankful we have a good accountant and a good attorney. If the two of them together can't figure out a way to keep DH out of having to pay even highter taxes next year, then he is going to pass on his raise. Just not worth it.

    It was said perfectly by someone else - sin taxes make you not want to drink and smoke. Taxing success? Makes you not want to be successful.

  24. A couple of years ago, I was rich and I paid a lot of taxes. Then came the recession, my capital gains disappeared and interest rates went down. Now I am not rich and I am not paying taxes. How is BO going to get me to pay more taxes?

  25. Dave Ramsey, Financial Planner on Fox, wrote a good perspective on the Liberal's punitive stance against Americans whom they deem 'rich'...

    Read: Butt Scratching and Bass Fishing

    Recommended reading for your next taxpayer rally.

  26. I believe the word now is "unexpectedly". As in the jobless rate rose unexpectedly to.....

  27. From my post at www.truthandcommonsense.com

    When Obama spoke in the state of the union speech people wanted to believe he was catching on. When he visited the Republicans and started talking about spending too much money, people wanted to believe it had finally sunk in.

    Me, I figured his stripes and spots are embedded far too deep to change now. After reading Mao’s determined drive to revolutionize China, regardless of the carnage or destruction, I’ve become far more respectful of the committed ideologue. If Obama holds even a small percentage of the same drive in his soul, we’re in a heap of trouble.

    His lies, his cool lies, his distant impersonal observation of the events that he creates is spookily familiar. The great thing about our system is we can stop a kooky President, if the pressure on the Congress will force them to block him. If not, we get the surges of progressive and oppressive government like the New Deal and the Great Society.

    The next three years will be a series of him trying to push his world on us and our resistance to it. Does he think he’ll win? His budget assumes he does, and that is the last example anyone of good will and hoping for the best should need to know now we are in a world of hurt and this man is the one doing the hurting. The worst of it is that he’ll continue to act surprised and compassionate, as his policies and his little minions beat us silly. He’s hoping we’ll give up. He’s hoping, like many have, people will give up and turn to the government to provide just enough for them to get by. This is a war against your way of life, your future and Obama just sent his next volley broadside into America, and did it with a smile.

  28. No way. Rich liberals will gladly pony up because they want to pay more taxes.

  29. Archer52, what way of life is the a "war" against, high unemployment, racial disparity, record foreclosures, 30 million people w.o health insurance, Wall Street corruption, innocent people sent to Death Row, two unfounded wars and tax cuts. This is the world you want to live in and your future. You can keep that future and world. I would like to live in a world with low unemployment, etc...