The further to the left or the right you move, the more your lens on life distorts.

Thursday, December 23, 2010

Going Galt

What do the small blue, Eastern state of Maryland and the large blue, Western state of Oregon have in common? In 2008, the state of Maryland’s voters decided that social justice and fairness required a special Millionaire’s tax. Immediately, the number of millionaires on the state’s tax roles went down and overall revenue collection from taxes was lower. This year, the state of Oregon’s left-leaning voters decided that social justice and fairness required a special Millionaire’s tax. The Wall Street Journal reports:
Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected. ...

In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City's rate is higher. Oregon's liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their "shared sacrifice."

Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million.

A class warfare meme seems to resonate with those on the Left, but the harsh reality is that the rich have the option of “going Galt.”

That phrase is a reference to an Ayn Rand character in the book, Atlas Shrugged who simply disappeared (moved, earned less, etc.) once taxes became confiscatory.

Historically, lower tax rates tend to yield slightly higher tax revenues than higher tax rates do. But facts never seem to influence class warriors who are more interested in their unique ability to preen as they claim concern for those who have less. The only problem, their tax fairness arguments result in lower revenues (e.g., Maryland and Oregon) and therefore less money to those who really need it.

Oh, well, at least it feels good.

Update (12/25/10):

The The Wall Street Journal reports:

[T]he left wing of the Democratic Party remains passionate about making the U.S. tax system more and more progressive. ... Arguments for these retaliatory tax penalties invariably begin with estimates by economists Thomas Piketty of the Paris School of Economics and Emmanuel Saez of U.C. Berkeley that the wealthiest 1% of U.S. households now take home more than 20% of all household income. This estimate suffers two obvious and fatal flaws.

The first is that the "more than 20%" figure does not refer to "take home" income at all. It refers to income before taxes (including capital gains) as a share of income before transfers. Such figures tell us nothing about whether the top percentile pays too much or too little in income taxes. In The Journal of Economic Perspectives (Winter 2007), Messrs. Piketty and Saez estimated that "the upper 1% of the income distribution earned 19.6% of total income before tax [in 2004], and paid 41% of the individual federal income tax." No other major country is so dependent on so few taxpayers. A 2008 study of 24 leading economies by the OECD concludes that, "Taxation is most progressively distributed in the United States, probably reflecting the greater role played there by refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. . . . Taxes tend to be least progressive in the Nordic countries (notably, Sweden), France and Switzerland."

A second fatal flaw is that the large share of income reported by the upper 1% is largely a consequence of lower tax rates. In a 2010 paper on top incomes co-authored with Anthony Atkinson of Nuffield College, Messrs. Piketty and Saez note that "higher top marginal tax rates can reduce top reported earnings." They say "all studies" agree that higher "top marginal tax rates do seem to negatively affect top income shares." What appears to be an increase in top incomes reported on individual tax returns is often just a predictable taxpayer reaction to lower tax rates.