December 27, 2012

MEGAN MCARDLE ON THE FUTURE OF TAX RATES:

First, for all the talk about “going back to the Clinton-era tax rates”, that is not exactly what we’re doing. Since Clinton, other tax hikes have been passed, most notably to pay for Obamacare, which raise the marginal tax rates on the wealthy well above their Clinton-era levels.

Second, we’re getting to a marginal income tax level on top incomes that I’m personally uncomfortable with. As libertarians go, I’m not particularly fussed about taxes–I am, for example, on the record as in favor of letting the Bush tax cuts expire.

But I am uncomfortable when the government makes more money off your labors than you do. Yes, some people don’t work very hard to earn their money, or earn it in ways that seem illegitimate. But the solution is to change the law so that it’s harder to earn money in illegitimate ways, not to take the majority of their money in taxes–and the majority of the money of other people who work quite hard indeed.

And third, we’re pushing surprisingly close to the limits of the “raise tax rates on the rich” strategy. Oh, they can maybe go up another 10%, which would raise some real money–about $150 billion a year. But it’s not nearly as much money as we need. And my back-of-the envelope calculation assumes, fairly unrealistically, that raising the top marginal tax rate to 60% produces no income-shifting, doesn’t decrease capital formation, and doesn’t encourage anyone to lessen their work effort. While the literature on the income elasticity of taxation is varied, no one thinks the effect is zero–and one thing that people often don’t understand is that the higher the tax rate already is, the harder it is to raise it further.

Obama, et al., aren’t likely to be especially constrained by revenue limitations, though, as their real motivation is to hurt people they don’t like. It’s all about the punishment.