Why Taxing the Rich Is No Solution

July 31, 2012

Free Market Foundation

The Obama administration wants to raise taxes on the rich. Given that the United States is experiencing record deficits, raising taxes on the rich is a terrible idea, say Tino Sanandaji, an affiliated researcher at the Institute of Industrial Economics, and Arvid Malm, chief economist of the Swedish Taxpayers’ Association.

The economic strategy founded on raising taxes on the rich is based on two false premises.

The first is that tax increases on the rich are a solution to current budget deficits.

The second is the argument often put forward that there is “no evidence” that tax increases on the rich hurt the economy.

The Obama administration and other proponents of raising taxes on the rich have argued that not taxing the rich is the main cause of the deficit and thus the main obstacle to solving the fiscal crisis.

Estimates show that taxing the rich at the administration’s proposed levels would not bring in enough money to fund the president’s preferred level of spending. Not only will the proposed tax increases hardly reduce the deficit, raising the top tax rates is likely to harm economic output. Additionally, there exists robust empirical evidence that taxes impede economic activity.

A study conducted by former Obama advisors Christina Romer and her husband David Romer investigated all historical periods where taxes increased or decreased.

They took into account the causes of tax increases and found that tax increases tend to reduce economic growth, stating that “tax increases appear to have a very large, sustained and highly significant negative impact on output,” as “an exogenous tax increase of 1 per cent of GDP [gross domestic product] lowers real GDP by almost 3 per cent.”

The proposed tax increases will not balance the budget; rather, it is merely political resentment toward the rich and a reaction to excessively ideological supply-siders. Rather than raising taxes, we should close tax loopholes and broaden the tax base so as to raise revenue to its historic average, while controlling federal spending, say Sanandaji and Malm.

Source: Tino Sanandaji and Arvid Malm, Obama’s Folly: Why Taxing the Rich Is No Solution, The American, August 16, 2011.

For text: http://www.american.com/archive/2011/august/obamasfollytaxingtherich

For more on Tax and Spending Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=25

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 30 August 2011