American Elephants

Tax Hikes Don’t Mean More Revenue, or So the Evidence Says. by The Elephant's Child

Across the waters, the Labour government in its last days increased the marginal tax rate to 50%, in a tax-the-rich move, and the Tory-Liberal Democrat coalition kept it in place. The tax rate which kicked in at £150,000 a year was the first increase since then Chancellor Nigel Lawson cut it to 40% from 60% in the late 1980s.

The argument (does this sound familiar?) was that “rich bankers” were responsible for the economic crisis and should pay for the clean-up. Mr. Cameron preferred to say those with the “broadest shoulders” should bear the heaviest burden.

Well, once again, it didn’t work. Preliminary figures show that there has been ‘manoeuvering’ by well-off Britons to avoid the new higher rate. Revenue has dropped by around 5%. The Treasury had projected that monthly revenues would actually increase by more than a billion pounds.  When will they ever learn?

The state of Illinois, Obama’s home state, increased its corporate tax rate to 7.0% from 4.8% in January 2011. (Yes, if you want the economy to recover, raise taxes). That’s a 45% increase in the overall corporate rate. Caterpillar made it clear to Illinois officials that it chose to build its newest manufacturing plant outside of Illinois due to the “business climate and overall fiscal health” of the state. And took 1,000 jobs with it. They have also threatened to move their corporate headquarters. Modern Drop Forge and FatWallet have taken their jobs and moved. Canadian National Railway moved its locomotive repair shop and 250 jobs to Indiana. Other major corporations’ threat to move, with their 8,500 jobs, have gotten tax breaks over the next ten years to remain in Illinois.

High taxes and mandatory union membership participation have forced over 800,000 residents to leave Illinois for neighboring states over the past 15 years. But the most growth has occurred in no income tax, right-to-work states Texas and Florida. Illinois has led the country in job losses — over 100.000 — since the increase in taxes, and raised the unemployment rate to 10.1%.

U.S. taxes really are unusually progressive, and more progressive that almost every other rich country. And the rich have options. Steeper tax rates are a dumb way to try to improve fairness and raise revenue. The high-tax states are losing businesses and losing high income residents. California has a huge out-migration. Indiana has lowered rates and become a right-to-work state and is gaining businesses and driving the unemployment rate down.

Small business is not hiring because they are concerned about rising health care costs, government regulations, and the economic climate. Twenty-four percent are worried about being in business in 12 months. 85% say they are not hiring. 61% say they’re worried about economic conditions. But nobody listens.

Treasury Secretary Timothy Geithner says that “If you don’t try to generate more revenues through tax-reform, if you don’t ask, you know, the most fortunate Americans to bear a slightly larger burden of the privilege of being an American, then you have to —the only way to achieve fiscal sustainability is through unacceptably deep cuts in benefits for middle class seniors, or unacceptably deep cuts in national security.”(This is the throw Granny over the cliff gambit)

The Congressional Budget Office (CBO) rejects President Obama’s oft-repeated argument that in order to lower the deficit, it is mathematical certainty that taxes must go up. If President Obama and Congress set spending to match its historical level of 20 percent of GDP and keep it at or below that level, the deficit would be at its historical level in 2017, and the debt would fall as a share of the economy over time.  All that without raising taxes a dime.  Deficits are unsustainably high because the government is spending too much, not because it is collecting too little revenue.



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