“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Saturday, April 23, 2011

People Respond to Tax Rates, Stupid!

In these two recent posts, here and here, I commented in the vein of the Wall Street Journal editorials detailing the effects of higher rates on specific income strata.

But recent video clips of Wonderboy's barnstorming this past week have reminded me of a more visceral, simpler point which he obscures.

When the First Rookie makes statements like,

'We don't need more tax cuts for millionaires or billionaires,' or,

'I'm just sayin' that rich people, like me, should pay a little (hold up finger and thumb just a small space apart) more.....'

He misses the most fundamental points about human economic behavior. The ones that put Art Laffer on the map.

First, raising rates generally causes whatever economic behavior people are doing at higher income levels to appear to contract, in order to avoid paying more tax dollars. Making relatively larger levels of income, they can afford to either earn less, out of desire to prefer more leisure over suddenly-less-lucrative marginal income, or shelter or delay said marginal income.

Second, it's simply stupid to go around mis-identifying the rates of top income earners, rather than the gross dollars they pay, especially as a percent of total taxes paid, GDP, or some other external measure. And Wonderboy, having apparently no practical life experience outside of organizing the poor in communities, seems not to understand that what ultimately matters is the total dollars raised by a tax rate, not the rate, per se.

Thus Laffer's famous curve, which has been sustained by tax policies ever since the early 1980s. The lower the higher-end rates, the more total revenue is raised, as the higher-income earners keep a higher marginal percentage of their earned dollars.

This is something that so many Democratic Senators, Congressmen and Wonderboy just don't get. Sure, it sounds good to proclaim soak-the-rich higher rates for higher incomes. But if the objective is to get more gross tax dollars from the upper-income earners, lower rates will do a better job.

Sounds counter-intuitive, bu only if you're either unintelligent or not an observer of human economic behavior.

Demagoging about tax rates for upper income earners misses the point. What ought to be preferred is the rate which maximizes tax revenues from said taxpayers. And those are not higher rates, as many empirical, post-hoc studies have shown. Studies which correctly discriminate and distinguish among economic externalities, income sources and respective rate changes.

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