Contact FreedomWorks

400 North Capitol Street, NW
Suite 765
Washington, DC 20001

  • Toll Free 1.888.564.6273
  • Local 202.783.3870

Blog

    Tax Hikes on the Rich Won't Work

    House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) have made it clear that they will strive to raise taxes on all families making over $250,000 annually on January 1st. According to Nancy Pelosi, “I see no justification for giving a tax break…for the wealthiest people in America…the tax cuts at the high end have increased the deficit enormously.”

    To the contrary, the key culprit behind rising federal deficits is runaway government spending that has plagued Washington. The current federal $1.4 trillion budget deficit was not created because government taxed too little. As a result of the Bush-era tax cuts which lowered tax rates for all Americans, total tax revenue increased by 40 percent within four years. Between 2002 and 2004, tax payments by individuals who made more than $200,000 increased by 19.4 percent—more than double those taxpayers in lower brackets.

    In the current tax debate, we cannot ignore human action and motivation. President Obama claims that raising tax rates for wealthy Americans will increase tax revenue by $700 billion. Obama's prediction is improbable since the rich tend to be highly responsive to changes in their tax burdens.

    While the vast majority of Americans make less than $250,000 annually, raising taxes on the wealthy will have disastrous effects on the entire economy. Ultimately, hiking taxes for the rich will likely worsen the deficit while destroying countless jobs. As history has repeatedly proven, higher tax rates produces lower tax revenue.

    Simply, soak-the-rich policies have never worked in anyone’s favor. For instance, Maryland Governor Martin O’Malley raised income tax levels on wealthy households to 6.25 percent from 4.75 percent in 2008. Lawmakers in Annapolis wrongly predicted that this millionaire tax would generate $106 million. According to the Wall Street Journal,

     Well, the state comptroller's office now has final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

    Certainly,  Maryland’s millionaire tax back fired. It is estimated that Maryland lost $1 billion because one-third of wealthy residents moved or filed their taxes in other states with lower tax burdens. Since Maryland’s millionaire tax was implemented, Maryland’s deficit has increased from $1.7 billion to $2 billion.

    Similarly, New York enacted a “millionaire tax” that raised tax rates on all residents making more than $200,000 a year. However, since New York implemented their so-called millionaire tax its state revenue has declined by 9 percent. According to New York Governor David Paterson,

     We increased the income tax for millionaires last year. We projected that we would get $4 billion and we actually got well short of it. Tax the rich, tax the rich. We've done that. We've probably lost jobs and driven people out of the state.

    Raising federal taxes on the rich will also have similar unintended consequences—successful US companies will be more inclined to move to a country with a lower tax burden. The rich are better able to change the location, compensation or timing of their income in response to changing government tax policies. Wealthy Americans can generally afford to hire expensive lawyers or accountants to avoid paying numerous taxes. While the capital gains tax is expected to rise by 33 percent, billionaire Bill Gates and Warren Buffett hold most of their wealth in the form of nontaxed and unrealized capital gains. In various ways, the rich are the most responsive to shifting tax rates.

     Under the Obama administration's plan, the federal top two income tax brackets will rise to 36 and 39.6 percent. As President Obama once said, “I do think at a certain point you’ve made enough money.” If the federal government confiscates nearly 40 cents out of every dollar made, businesses are discouraged from expanding their operation and would be entrepreneurs are deterred from starting new enterprises.

    Instead, Congress must lower taxes for all Americans across the board to lower the deficit and boost job creation.  President Kennedy favored “an across-the-board, top-to-bottom cut in personal in corporate income taxes.”  In the eight years that Kennedy’s tax cuts were in effect, tax revenue actually doubled. Hiking taxes on the rich is simply a lose-lose situation by stifling economic growth while increasing the budget deficit.