Alan Reynolds on Top Tax Rates

David,

May I suggest you invite your entrepreneur friend over for guest-blog and share his experience? There must be a lot of great stories and lessons behind that $400K credit card debt story, not to mention the subsequent million-dollar a year income.

I second Biomed's request.

Reynolds is very mistaken...

Death of a Loophole, and Swiss Banks Will Mourn
By GRETCHEN MORGENSON
Published: March 26, 2010
NY Times

WITH all the hoopla over the health care bill, hardly anybody noticed that a job creation bill that President Obama signed on March 18 makes it much harder for United States citizens to avoid taxes by hiding money in overseas bank accounts.

Individuals have stashed an estimated $1 trillion in offshore accounts, the government says, allowing them to avoid up to $70 billion in taxes each year. The federal government estimates that abusive offshore schemes by corporations cost our Treasury an estimated $30 billion in tax revenue as well.

@Steve J.
He may be mistaken (though I doubt it), but you didn't give evidence for your claim. All the strategies he discusses were legal before March 18 and are just as legal now.

I second the applause for this article. Too bad there wasn't space enough to discuss the gargantuan deadweight loss that will accompany these tax rate increases, i.e. all the productive and entrepreneurial activity that won't take place. David, do I correctly remember you quoting an estimate of Feldstein's that each additional federal tax $ entails 75 cents of DW loss?

What happens under the very long run though? Long run elasticities are higher than short run elasticities.

I can't help but think of the theory of the core and the very Ayn Rand notion that the highly capable could opt-out of current society and trade amongst themselves.

Just anecdotally, I recently had a conversation with a friend, a very smart Stanford Computer Science grad and current Oracle employee from Spain. First, he's going to work at a Spanish bank for the following six months as he's tired of paying California & US taxes. After six months, he would trigger various Spanish tax laws, so he's moving to Hong Kong where he has a second job lined up.

As I understand it, "the rich" are supposed to pay for covering the uninsured, Social Security reform, the long term budget gap, and so on....

Are we heading full speed towards the revenue maximizing tax rate along the Laffer Curve for the rich? Does any argument against tax increases have salience with the left other than (1) your tax increase on the rich won't raise revenue or (2) your tax increase on the rich will be passed along so that it harms the "least well off group?"

My impression is that for many, Rawls rules supreme; any deadweight loss by the "rich" is justified if it improves the condition of the least well off group.

For some time now, especially with the election of Barack Obama, much has been made of the fact that certain American businesses and the super wealthy pay a disproportionate share of the countries taxes, some figures thrown about are that 10% of Americans are paying 80% of the taxes and that up to 50% of Americans make so little money that they pay no taxes at all. These figures are routinely used by those many commentators to criticize the proposals by President Barack Obama to increase the taxes already imposed on those businesses and those uber wealthy individuals claiming that they already bear almost all of the tax burden to begin with and that any increase in their tax payments would be confiscatory and thus immoral, and would almost certainly be countreproductive in that the increases would either lead to an exodus of those businesses and individuals to countries where they would pay little or no taxes at all, or worse, would simply pass the increased tax burden to the consumers of their products in the form of higher prices for their companies goods and services.

For my part, I have no argument with any of these positions or conclusions, they strike me as credible, reasonable, and entirely possible. My point is rather different and yet to me no less important, and that is how is it that the huge, diverse, and competitive American economy came to be so dominated by just 10% of the businesses and capitalists that these two groups now effectively control up to 80% of America's tax burden and thus 80% of America's economy? How is it that so many Americans have been left behind by that same economy that up to 50% of the citizenry can only make enough income to pay a paltry 20% of the American tax burden? It strikes me that the real anger of the American public can be found in that reality, that no matter how high or low the American economy rises or falls, that 50% of Amerca's working population will always be left behind and be fully aware that they are being left behind.

This is the issue that won Barack Obama the last election, his promise, however ill advised, to "level the playing field' and to "redistribute" the fruits of the American economic system by taxing the rich to pay for entitlements and benefits for the Middle Class and the poor. Of course his plans have gone awry as they were bound to and as any mature, experienced, and common sense financial advisor could have told him they would. The powerful businesses and the super wealthy have even more power than the American Federal Government, and control much of it anyway, or they control those Cabinet appointees and their deputies who run things. Not to mention the serious, real, and immediate financial clout and personal connectins they can use to influence lawmakers and even the common citizen. Besides, government intervention in regulating businesses has never been very effective or popular, even the various "Trust Busters" of the past had only minimal and short lived success.

The question however remains, however, and it really deserves an answer. Ans that question is how to create a situation where 80% of the American economy is dominated by and controlled by 80% of the American people who share in the fruits of that economy as well as pay the lion's share of the tax burden to support the government which governs the nation? The present situation is fast becoming untenable, that is, 50% of America cannot and will not accept the status of a permanent underclass, condemned to low paying or minimum wage jobs in competition with illegal foreign workers or outsourcing of jobs to other countries, or unemployment, or chronic underemployment. The election of Barack Obama may well be a flash in the pan, more a result of an electorate poisoned by it's media against anything Republican and an economy in free fall, rather than any real support for the Democrat's and Obama's neo Socialist policies. Or it may be a sign of an incipient revolt against the American market system which has lost it's competitiveness and fairness and concentrated it's wealth and power into the hands of a relatively small number of global trusts and the uber wealthy capitalists who control them.

Well folks, I don't know how to do it either, but there has to be an answer apart from revolution or another four years of a hoplessly immature, inept, and economically inexperienced Barack Obama. The government and the private sector need to come up with positive and applicable answers to the question of how to bring that 50% of the non tax paying American public into the greatest, most just, and most productive economy in the history of the world, the American market economy.

All the best,

ken,

you make a huge leap when you assume the reason that the lower 50% pay no taxes is because they don't make any money. the bottom 50% does make money, and they certainly could afford some broadening of the tax base. but politically it's easier for that 50% to continue to vote for tax decreases on themselves and increases on the top 10%. so you wrote out 1000 words or so almost entirely based on a simple logic error at the very beginning. you write "now effectively control up to 80% of America's tax burden and thus 80% of America's economy". it should be obvious why "thus" is not appropriate in this instance. it doesn't mean your line of reasoning is entirely invalid, but you'll need to rework it a bit.

Thanks for your kind response and gentle critique of my comments. I would offer that I am not an economist and but I have lived for decades in a heavily socialist state, that is, Israel, where the scenario I described in my comments really exists and could occur even in America if politicians like Obama successfully hoodwink not so well off Americans into believing that a big nanny state could effectively take care of them.
That is really what I am afraid of, Americans voting away their economic freedom and self reliance, just as we here in Israel have finally started to get rid of the socialist chains which have held us back for decades, many of us holding up the American market economy as a model and an ideal.
All the best,