Thursday, July 10, 2008

Fair Taxes

Scott Adams recently posted on "Fair" taxes. A suggestion was to tax the rich at 90%.

Apart from all the good arguments about removing incentives, there are a number of good reasons that everyone can agree on to not tax at 90%.

1. People will leave. Lots of people in your target demographic will change jurisdictions to a less punitive location. Even with the Draconian US laws, which tax US citizens on all their world-wide income, where ever they live. If you are aggressive enough, rich people will renounce their citizenship and move.

2. "Profit" per taxable dollar will drop. As the rates go up voluntary compliance goes down, meaning either a larger black market or increased compliance costs. Probably both.

3. Incomes will go down. People will find other ways to get satisfaction. Personal incomes will decrease as they transfer their earning power to produce other results than increased personal wealth. Perhaps this would benefit the poor, maybe not.

4. Tax avoidance (and evasion, but I already listed that) will become even more popular. The more money that the government takes the more money people will be willing to spend to stop them. One of the ironies of high taxation is the amount of intellectual horsepower that is essentially wasted avoiding it. Those people could be doing something productive.

5. Special interest groups will try to make the government treat things in tax-beneficial ways. Oh, that happens anyway, but the stakes will be higher.

6. It is likely this will result in lower GDP growth, which reduces the size of the pie, which makes the whole thing less effective.

The bottom line is you can't just keep increasing tax rates and get more. It is an inelastic system, and at some point returns go down. So even if you'd like to tax the rich at 90% and solve all your problems, you just can't. Sadly I heard a rumour that one of the US Presidential candidates would like to tax the rich more, even if that meant less Federal money, just because that would be "fairer". Only for tax lawyers. :-)

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