The Decline of Economic Common Sense

“70% Tax Rates and Free Stuff”

It seems like every day we hear a national elected official or personality promoting some type of government policy or intervention they say will usher in a new era of fairness and equity. Most of these policies involve a great deal of money, usually federal, and in most cases, an expanded involvement by government in the lives of its citizens. It seems as if we are really tottering on the edge of a Santa Claus economy where everything is free and cost is no object. In fact, we are often told all we have to do is tax the rich to pay for everything.

Some, who should know better, really seem to believe we can levy 70%-90% top bracket national income tax rates, up from 37% now, and the money will just come rolling in. This sort of thinking feeds into the mindset that all we have to do is take lots of someone else’s money in order to have free everything. They ignore the fact that as tax rates change, behavior changes also.

High income tax rates encourage tax evasion (illegal) and tax avoidance (legal). The lower income tax rates are, the less an economy will have of both because the monetary rewards are lower. In addition, it is really hard to support ultra-high income tax rates when we have a Declaration of Independence that refers to: “Life, Liberty, and the pursuit of Happiness.” It is hard to pursue these things if government doesn’t leave you much after taxes.

Is a citizen’s primary purpose in life to support government? I thought it was to be productive and generate income that will make the economy stronger and raise the standard of living of citizens. This whole discussion should hinge on the application of common economic sense and the preservation of liberty. If an individual cannot spend the lion’s share of his or her own income, how is this person free?

Economic history proves that when tax rates change, behavior changes. If the top personal income tax rate in the United States was increased to 70%, it would mean, for those in any type of pass-through business, the cost of purchasing business assets would be only 30% of the price. A new bulldozer would only cost 30% of its normal price and a new airplane would also cost only 30% of its selling price because these are business expenses. There would also be little incentive to increase business income over the point at which the 70% rate would begin to apply. Entrepreneurs would search for other ways to benefit from their productive efforts. High rates also can significantly increase the demand for tax accountants, lawyers, and financial advisers in order enhance the tax avoidance process. However, high rates are good job security for members of these professions.

It is also easy to imagine that the amount of income declared in this higher tax bracket could well decrease significantly due to the dramatic incentive for people in this bracket to make very different decisions about how income is both earned and reported. These proposed high brackets also do nothing to address illegal income which is not reported anyway. Those who are involved in illegal income-producing activities actually could care less what the tax rates are.

Those who are advocating these confiscatory levels of income taxation are living in an economic fantasy land. They are also demonstrating a lack of appreciation for freedom. Any society that undertakes to hammer the productive and the successful will slow the rate of economic development and reduce job opportunities. These rates will also encourage individuals and businesses to spend more time on tax avoidance, (and tax evasion), and less time concentrating on producing the goods and services, and the income, that makes for a prosperous economy.