Pleasing the Proletariat
Obama’s call for increasing taxes on the wealthy is playing well with the ever-expanding ranks of the proletariat. According to a September 15-18th Gallup poll, 66% of respondents favored increasing income taxes on individuals earning at least $200,000 and families earning at least $250,000.
The results of this poll make a lot of sense as one would expect resentment from an ever-growing underclass. According to the U.S. Census Bureau, the nation’s poverty rate rose to its highest level last year at 15.1%. 46 million people- roughly the combined populations of California and Virginia – were officially poor, and the median income dropped by more than two percent to $49,445. The poverty rate among African-Americans and Hispanics is even worse at about 27% for each group.
Of course, President Obama’s response comes straight out of the Democratic playbook – attempting to raise those at the bottom up by dragging down those at the top. The Soviets tried this radical approach before, and the Russian people are still recovering from the ensuing wreckage.
Few become wealthy through being excessively frugal. Most do so because they find ways to increase their incomes by providing a valuable product or service to free markets. Similarly, the only sure-fire way to get the country out of the current economic morass is through tried-and-true economic growth.
Sadly, empirical evidence suggests that taxing the rich actually reduces GDP growth.
Before I address this provocative conclusion, I would first like to lay to rest the ridiculous notion that the wealthy do not pay their “fair share.” According to The Economist:
“The rich pay a substantial share of taxes across the developed world, and this share has risen in recent decades. According to the OECD, a think-tank, the top 10% of earners contribute about a third of total tax revenues—28% in France, 31% in Germany and 42% in Italy. Rich Britons pay about 39% of total taxes while America’s wealthiest households contribute a larger share to government than in any other OECD country, at 45%. Looking just at income tax, the share paid by the top 1% of earners in America rose from 28% in 1988 to 40% in 2006, in Britain it rose from 21% in 1999 to 28% this year. America’s greater dependence on its rich is due in part to their good fortune. As of 2007, the total earnings of the top 1% equalled 74% of all taxes paid, up from 24% in 1976. The rich are a juicy target because their taxes could conceivably cover far more of the budget than before.”
In other words, the wealthy are paying more of their “fair share” than ever. However, when a state’s policies are failing, scapegoating is a useful technique for distracting the masses, and President Obama is a maestro in wielding weapons of mass distraction.
Martin Feldstein, a Harvard economist, found that “taxable income among high earners adjusted, dollar-for-dollar, with tax rates” when he studied the 1986 Tax Reform Act, which lowered the top American marginal tax rate from 50% to 28%. Economists found similar results when they analyzed Margaret Thatcher’s British tax cuts in the 1970s.
When economists performed similar studies across a number of countries and time periods, the effect was not as dramatic, but present nonetheless. Under these conditions, a 1% increase in the marginal tax rate reduced taxable income by 0.1-0.4%.
More important is the question about how tax increases affect GDP growth. Again, The Economist provides some shockingly high figures:
“In the short to medium term, tax changes have large effects. An isolated tax increase of 1% reduces real GDP by almost 3%, mostly because tax rises have a significant effect on investment…The impact on growth is relatively persistent; the greatest effect is felt more than two years after the change.”
While Mr. Obama’s politics may be playing well in Peoria, they reflect a serious misunderstanding of empirical economics.
This is all about political scapegoating, because I doubt Mr. Obama is that stupid. If I’m wrong, God help us.
It turns out Obama’s policy is not math after all. It’s class warfare.