Every 1% tax rate increase lowers economic growth by 3%, per numerous studies.

Ironically, closing the loopholes doesn't have that effect, so if you need the money this is the way to go.

Republicans are proposing to raise revenues via closing loopholes - and they are not for the rich, they are just for avoiding the ignorant strategy of raising tax rates - they are blamed wrongly! (Republicans need to explain that - I've never heard one do that.)

"All boats rise in a rising tide" is the Republican approach (not the rumored "trickle down" crappola).


Here, there is an arguable trade-off, with no one having the perfect mix.  If we pull more money out of the economic system by taking more from the rich (who also pay most of the taxes already), aren't we leaving less money to be invested for growth?   Of course, as the rich may spend what they want to and not have that affected, but they'll be less extra money to plow back into investments.   And no new investments = no new growth, plus decline.    Less investments = less growth

Currently about half of all taxpayers pay almost no income tax and the other half pays for them.  Anything wrong with that picture? 

I can't believe that Republic politicians say things like raising taxes will hurt the economy, as if people really understood that.  Repeatedly Make an assertion, by itself, does not make something true to another person.  You must repeatedly assert the reasons underneath it and increase the understanding on why it is true.  It is much easier to be simple about it and appeal to people's lack of knowledge.  It is much more appealing to say "let's tax the rich and that will solve the problem" 


The effect of tax incentives

Historically, the super high marginal tax rates for the rich originally caused the money to go to tax-free municipal bonds and away from investments - and growth went down while taxes also went down (the opposite effect of that which alot of people assume).   A bit of history on the effects.

The no tax advocates must explain the "why" - most people don't know

It is not a good idea to simply be against "no new taxes", including being for not taxing the rich - if you hold to that but never create the understanding of the "why" of it - and that you are actually looking out for the interests of all of the nation. 

If you get stuck with the accusation that you are just for the rich, you will have alienated the voters from you - needlessly - though it does take some effort to remove the lack of knowledge and understanding.

It is not a good idea to use the phrase "trickle down economics" as it is offputting and to some degree not really representative of what actually occurs.  It looks like the rich get all the money and then let some slip down to the lower enders.  What is true is that we all prosper more when there is growth - the rich, the middle class, and the poor (who will mostly no longer be poor).  The more apt term is "all boats rise in a rising tide" and "all citizens benefit from a rising economy" (of course, they have to be responsible for earning their share of it!!!!)

But it sounds so rational, as the rich can afford it

This sounds rational, on its own, but everything is in the context of the actual world:  “”People like (Obama), as he’ll say, who’ve been very fortunate in life, have the ability to pay a little bit more.” 

And, believe it or not, the majority of voters support taxing the wealthy - why not!!!?

One of the errors even midlevel accounting students would make is to judge the probable results on only one part of the whole, failing to consider the corollary effects on the whole. 

Those who want to tax the rich more should look at history.  Taxing too much actually too money out of the investment system and lowered growth (and actually lowered tax collections in total!).   We can argue how much the offset will be, but we can't argue that there will be no trade-offs, no costs otherwise.

Here's the "benefits" of taxing

If we held all other things equal and assumed no other impacts:

A 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion."  (Megan Mcardle)

Let's see now - the deficit is $1.6 trillion - uh, we can't solve it by taxing the rich.  We could get another $270 billion by taxing the middle class on the pre-Bush-tax-cut rates. 

Oops, that's not enough.

Maybe there is some sense to this being a spending problem first.

Encourage investment, create growth, create jobs 

History suggests that low taxes on the rich encourage investment and growth. With many economies weak, now is not the time to saddle capitalists with greater taxes, particularly since the rich are among society’s most mobile: the footloose wealthy will simply move, taking their taxes with them.

Yes, the rich "can afford it" and still be ok.  And we are not particularly interested in their welfare (so to speak).  So our criteria must be based on how it will affect us.


In the late 1970s top marginal income-tax rates of 60-90% were not uncommon across advanced economies. But with the dawn of stagnation, academic economists favored reduced government intervention, and lower, flatter tax systems gained ground.

America’s rich have done better still. The top 1% of earners in America (roughly, those earning more than $400,000 a year) captured 58% of real economic growth from 1976 to 2007, and now take home roughly 18% of all pre-tax income earned, up from less than 10% in the 1970s.

The supply-side tax revolutions of earlier eras prompted a wave of studies looking at the effect of lower taxes.

Did people behave as expected? And were tax changes good for growth? Early results were instructive. The rich do not often respond to tax increases by working less, for instance, as was widely assumed. But taxable income is very responsive to tax changes. The rich adjust by tweaking the manner and timing of their compensation.

In general and across time periods and countries, tax changes affect the choices of the rich, though the big responses of the 1980s and 1990s may have been unusually large. (Goalsbee did a study showing that the effects of taxes being lowered was exaggerated by another factor that increased incomes.) Studies generally show that a 1% increase in the marginal tax rate reduced taxable income by 0.1-0.4%, though sometimes and in some places it may be higher. The rich, though, are more sensitive, responding two to three times more than poor households, according to a Danish study. Changes in taxes on capital income also generate bigger responses than changes on labour income.

New technologies benefit highly talented workers, who market themselves globally and reap large returns. These “superstars” are more mobile than ever before.

The actual effect is...

There exists robust empirical evidence that taxes impede economic activity. In conventional economics, only the magnitude of the negative impact of taxes on economic output is debated, not the existence of such an effect.

In the short to medium term, tax changes have large effects. An isolated tax increase of 1% reduces real GDP by almost 3%, mostly because tax rises have a significant effect on investment.The impact on growth is relatively persistent; the greatest effect is felt more than two years after the change.

Higher rates on the rich are not, then, a free lunch.  At low levels rate increases will lift revenue, but not without a cost in efficiency and short-term growth. If the budget is a government’s primary concern, then the evidence is that reforms which close loopholes and broaden the tax base are a more efficient way to bring in more money than higher taxes for the rich.

Perhaps a clearer example is Ross Perot, who founded EDS, sold it to GM for many billion dollars, and invested the proceeds in government bonds.  Clearly, if his taxes were increased, he would not say to himself "ah well, it was nice to be able to eat filet, but now I'll have to go back to hamburger" but would simply sell off some of his government bonds to pay the taxes, which the government would then use to buy the bonds.
In other words, it would be purely a bookkeeping operation, totally without effect in the real world.

But it is so appealing to live according to this old poem:

Don't tax you.
Don't tax me.
Tax that fellow
behind the tree.

Fairness, unfairness, and making "them" the enemy

To make this a moral gesture of fairness is not reasonable, though it could be appealing.  Since time immemorial, groups have developed hostility to other groups, each calling the other immoral. 

But who's right?

Neither, they just have different points of view and values. 

The other isn't evil.  At worst uninformed, but not evil.  The solution is to inform the other, not spew invectives!

For those who love the Obama stimulus

Note that the Bush tax cuts were passed as a form of stimulus to get out of the recession caused by the technology bubble bursting.  It did work, at least somewhat, to pull us out of the recession caused by the internet bubble bursting

Is the opposite true?  Raise taxes and cause more growth?

Clinton raised taxes and there was more growth - things happening together but not causal.  Taxes went up during the internet boom - and that is what balanced the budget, as spending continued upward.

A common logic error is to assume that that whoever is present is the cause of what happened at the same time.   But it was the internet boom, which was not caused by any President, but by other factors, that caused the surplus.  (Sorry, Mr. Gingrich, there is one more thing you can't credit yourself with.)


Obama and Buffett are completely right. The rich do not “need” to pay lower taxes, and can certainly “afford” tax increases. If raising taxes on the rich would solve the deficit without hurting the economy, we would support the president’s tax policy in a heartbeat. It would certainly be a more equitable solution to lower the already astounding standard of living of hedge fund owners than to “cut some kids off from getting a college scholarship.”

And there is some misleading behavior here, unless the President doesn't understand all of this.  The President has made sure to give voters the impression that the Republican refusal to tax the rich is the main cause of the deficit and thus the main obstacle to solving the fiscal crisis.  (Ah, the old childhood strategy of blaming and shaming!)

Obama stated that “tax cuts that went to every millionaire and billionaire in the country” will “force us to borrow an average of $500 billion every year over the next decade.” This message has been widely repeated: Jon Stewart, for instance, has assured his impressionable audience that without the Bush tax cuts, future deficits would not be a major problem.

But how much revenue are we really talking about? According to the New York Times, the president’s plan to abolish the Bush tax cuts for those making more than $250,000 is expected to bring in merely $0.7 trillion over the next decade, or about 0.4 percent of Gross Domestic Product per year. As a comparison, the Congressional Budget Office estimates that the deficit over the same period is going to be $13 trillion, more than 6 percent of GDP per year.  Unfortunately, if you run the numbers as you are supposed to, the President's solution solves only 5% of the deficit!

There's a limit.  Golly, gee whiz!

The rich in America obviously have lots of money, but there are simply not enough of them to fund the president´s preferred level of spending. For all the attention it has received, President Obama’s “taxing the rich” policy can best be described as symbolic in nature, a rounding error compared to the deficits in the president’s budget. Obama centers his speeches around tax hikes on the rich to lead voters into believing that hard choices on the economy can be avoided simply by taxing the rich at a higher rate.


Christina Romer left the White House in utter frustration. (See Confidence Men, Ron Suskind.)

A key study has been done by former Obama advisor Christina Romer and her husband David Romer. They also take into account the causes of tax increases.  They find 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 one percent of GDP lowers real GDP by almost three percent.” Similar results have been obtained by Harvard economist Alberto Alesina using a different methodology.

The effect of the personal income tax on business owners on their hiring activity: Business owners who received larger tax cuts expanded their hiring more.

This runs contrary to a common argument that taxes may matter only for ordinary people, but not for the already rich or for entrepreneurs who care mainly about developing their company!

We might like to believe that someone who is already a millionaire doesn’t care about obtaining even more money. But this does not appear to be how actual millionaires behave. Even some billionaires actively attempt to lower their tax rates, for example by relocating to tax havens.

Higher income people may move the money and/or themselves

While excessive acquisitiveness (greed) is hardly a virtue, acquisitiveness and ambition might not be bad traits in entrepreneurs. Otherwise Steve Jobs, Sam Walton, and Warren Buffet might have cashed out and retired in Tahiti after making their first $100 million instead of staying on and developing their companies.

While it may offend an egalitarian worldview, top entrepreneurial talent is not easily replaced. “Super-Entrepreneurs” often tend to be extremely talented individuals with access to well-paying, comfortable jobs in already existing firms. In order to entice enough of them to take the risk, hard work, and uncertainty associated with entrepreneurship instead of opting for a safe and well-paying job, there must be a substantial reward associated with success.

One way to better approximate the behavior of innovative entrepreneurs is to study investments in the Venture Capital (VC) sector. VC plays a central role for high-potential firms. More than half of those entrepreneurial firms that were successful enough to make an IPO and become public had VC backing. Harvard researchers Josh Lerner and Paul Gompers show that VC fundraising in the United States is highly sensitive to capital gains taxes.7 Their results indicate that the cause for this is that lower capital gains taxes encourage more skilled individuals to become entrepreneurs.

Entrepreneurship is what economists refer to as a “tournament,” a process where many compete for a prize that only a handful will ultimately receive. If taxes reduce the value of the prize, fewer will enter the tournament, even assuming that the behavior of the winners doesn’t change. Economists William Gentry and Glenn Hubbard found that high marginal taxes reduce the probability that an individual will enter self-employment to begin with (although admittedly the data did not allow them to establish this definitively)

But taxes also matter for the ability to build a new company, even disregarding the personal wealth of the entrepreneur, as extra profits are what tend to provide the capital to grow.

Profit taxes lower the amount of capital available for reinvestment. The negative effect of corporate income taxes on business investments has been confirmed by numerous studies, such as a recent one conducted by Harvard economist Andrei Shleifer and co-authors.

The actual solution, in front of our eyes, yet we are blaming those who advocate it

Currently, less than half of national income is included in the basis for taxable income. Instead of raising tax rates, we can close tax loopholes and broaden the tax base so as to raise revenue to its historic average, while controlling federal spending. This is preferable to increasing tax rates based on the faulty notion that raising taxes on the rich does not hurt economic output.

House Speaker John Boehner disputes the notion that Republicans are “servants of the rich.”

“That’s very unfair,” Boehner said in an interview aired Sunday on ABC’s “This Week.” “Listen, I come from a family of 12. My dad owned a bar. I’ve got brothers and sisters on every rung of the economic ladder.”

Not a good counterargument! 

One in three Americans say they believe Republicans in Congress favor the rich. Nine percent say they favor the middle class, while 2 percent say they favor the poor. Fifteen percent say Republicans in Congress treat all classes equally.

Top conservatives are suggesting that super-committee Republicans are considering raising revenue by doing away with certain tax loopholes and personal deductions in exchange for keeping individual tax rates at or below the levels enacted during the President George W. Bush era.  Those conservatives should stop objecting, as this is the most effective way to do things, if we need the money, without hurting the economy!!!

“Republicans wouldn’t be agreeing to tax rate increases,” wrote Fred Barnes in the Weekly Standard. “Rate increases are economically harmful. Getting rid of loopholes and special breaks usually isn’t.”

Other tidbits, only for those interested in more

The United States still leads Western Europe in innovative entrepreneurship. For instance, each year venture capital investments per person are about four to five times higher in the United States than in Western Europe. Is the president willing to risk one of the last sectors in which the United States enjoys a comparative advantage, betting that less burdensome taxes have nothing to do with this competitive edge?
wrong cause...

If you assume that the effort the taxpayer is willing to put forth is proportional to his incentive
My own belief is that total tax rates of more than 50% on the rich are certainly pointless and destructive