Who could have seen that happening? People don’t want to pay higher taxes if they don’t have to. Amazing. I read about this flight of the wealthy in The Telegraph.
The latest estate agency figures have shown large numbers of France’s most well-heeled families selling up and moving to neighbouring countries.
The previous top tax bracket of 41 per cent on earnings over 72,000 euros is also set to increase to 45 per cent.
British Prime Minister David Cameron is delighted by this exodus.
Prime minister David Cameron angered the French last month when he said he would “roll out the red carpet” to wealthy French citizens and firms who wanted move out and pay their taxes in Britain. He told the B20 business summit in Mexico in June: “I think it’s wrong to have a completely uncompetitive top rate of tax.
“If the French go ahead with a 75 per cent top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they can pay tax in Britain and pay for our health service and schools and everything else.”
At this point, I would like to go back a little in history. Andrew Mellon was the Secretary of the Treasury back in the 1920’s. He served under Presidents Harding, Coolidge, and Hoover. When he first became Secretary, in 1921, the highest tax rate was 73%. He proposed dropping the rate to 25%. America was in the middle of a bad depression then and many people were afraid that such tax cuts for the wealthy would lead to a loss in revenue for the government. Mellon responded that it was better to have a low tax rate that people actually pay than a high tax rate that people evade. It turned out that he was right.
I hope that Barack Obama is paying attention to these lessons. I have a feeling that he cares more about punishing the evil millionaires and billionaires than in maximizing revenue to the government.
In the early 1920s the highest tax rate was 73%. In 1921 President Harding appointed Andrew Mellon to be Secretary of the Treasury. Over the next eight years he reduced the top rate to 24%. The result, federal revenue increased from $700 million to over $1 billion. Every year that decade the federal government ran a surplus, hard to believe I know. Unemployment and inflation were at record lows.
It may seem counter-intuitive that lowering tax rates would increase revenue but it is actually easy to understand. In general, people do not like paying taxes. They will often go out of their way to avoid paying taxes by exploiting any loopholes in tax codes, decreasing any activity that is taxed, consuming less of any commodity, or just plain cheating. If tax rates are relatively low, it is not worth the trouble and people go ahead and pay their taxes. If tax rates are relatively high, then people start putting their money in tax shelters.In other words, people don’t just sit still and allow themselves to be taxed. They take action to limit their tax burden as much as possible.
The reason I mention all of this is that there seems to be a movement among the Democrats to raise taxes in order to lower the deficit. They believe that the reason that we are in the fiscal mess we are in is because people, especially the greedy rich, just do not pay enough in taxes. The problem is that raising taxes simply will not produce the bonanza of increased revenue that they expect. Raise taxes on the wealthy and they will send their money abroad, or not invest, or do what it takes to pay as little as they can. I know I am being repetitive, but I cannot seem to pound that concept into Progressives’ heads.
In any event, revenue to the federal government as a percentage of GDP seems to hover at about 19%, regardless of tax rates as shown here and here. And check out this chart here. The US has the honor of having the second highest corporate tax rate in the developed world, 13% higher than the OECD average. This is not exactly helping our recovery.
I have been meaning to write a post on why taxing the rich will not get us out of the fiscal mess we are in. Fortunately Alan Reynolds has done the work for me in a piece in the Wall Street Journal. The interesting thing is that no matter what the actual tax rates are, the amount of revenue that the government receives remains about the same, as you can see in this chart.
Or as Alan Reynolds writes;
All this nostalgia about the good old days of 70% tax rates makes it sound as though only the highest incomes would face higher tax rates. In reality, there were a dozen tax rates between 48% and 70% during the 1970s. Moreover—and this is what Mr. Reich and his friends always fail to mention—the individual income tax actually brought in less revenue when the highest tax rate was 70% to 91% than it did when the highest tax rate was 28%.
There is more worth reading. If I get the time, I should see if I can find the actual government revenue over the years, in dollars adjusted for inflation and compare it to tax rates.
In any event, it should be obvious, but somehow it isn’t, that the problem is not that we are not taxed enough, it is that the government spends too much.