It is an article of faith among Democrats, and most specifically President Obama, that the rich are not paying their “fair share.”
According to liberal orthodoxy, only by raising taxes – currently by allowing the higher-end Bush tax cuts to expire -can the budget be balanced and fairness returned to the tax code as the wealthy are stripped of their ill-gotten gains.
But there is a problem.
The premise isn’t true.
First, the progressive meme of “under-taxed” Americans is a charge in search of evidence.
According to the IRS and the Tax Policy Center, the top 1% of Americans pay 38% of all taxes. The top 10% pay 70% of all taxes.
The bottom 50%? They pay less than 3% or no tax at all.
Hardly the stuff of a regressive tax system.
But the second half of the progressive argument, loudly trumped in the liberal blogosphere by Ezra Klein and others – that tax cuts “cost” the Treasury money and only raising taxes can replenish it – has been put to the test in Great Britain, with interesting results.
Before the end of the Labour government in 2010, Gordon Brown’s administration passed a fairly staggering 25% increase in the top marginal tax rate for England’s top earners. In Britain, that translates to anyone who make more than $238,000 per year. For these sorry souls, the tax rate was increased from 40% – where it had been since Margaret Thatcher had been PM – to 50%.
Now, after a full year of tax collections, the results are in and should be disheartening to progressives and tax-raisers everywhere.
At the new 50% level, the British government collected $806 million less than at the previous 40% rate.
To say this a different way, after increasing taxes by 25% on the top wage earners provided $800 million less in revenues.
Making matters worse, British bureaucrats had expected and projected that the new tax to create a $1.5 billion windfall that simply did not materialize.
The practical implications of the British example are clear, if uncomfortable, for the American Left.
Consider that the High Priests of the progressive “tax-ology” have always maintained that if only the Bush tax cuts on high earners were allowed to expire, the US Treasury would be flush with $700 billion over a decade.
The British example, however, proves (again) the maxim that capital will go where it is welcomed and earns the highest return; ironically making higher tax rates the source of diminished revenues. As the Kennedy, Reagan and Bush tax cuts all proved, lower tax rates redirect capital to productive, economy-growing activities that create jobs and growth, and it is this activity that creates higher revenues.
A useful lesson to President Obama and his supporters, but probably one that will fall on deaf ears.