Do Taxes on the Rich Raise More Revenue?

Do Taxes on the Rich Raise More Revenue?

Robert Frank
Wall Street Journal
Sept. 15, 2011

The debate over taxing the rich in the U.S. seems to center on “fairness” – who pays too much or too little.

Yet there is little discussion about a more immediate question: Would it raise the expected revenue?

Great Britain’s recent experience may be instructive. The U.K. has imposed a new tax rate of 50% for those making £150,000 a year (or about U.S. $236,000). There is a fierce battle between British Chancellor George Osborne, who wants to scrap the tax, and many Liberal Democrats, who want to preserve it.

The Chancellor has asked for a study to find out how much revenue the tax has raised, though hard numbers won’t be available until next year. It was expected to raise £2.7 billion a year.

That hasn’t stopped people from guessing. A report from Britain’s Institute for Fiscal Studies said the tax is costing the treasury £500 million a year, instead of earning billions. The reason: High earners are simply finding ways to avoid the tax.

The IFS, an independent think-tank that focuses on tax policy, said top earners are hiding income or moving their earnings offshore.

“It looks like the 50p rate may be too high and that it is possible it will reduce tax revenues,” Paul Johnson, director of the IFS, told the Telegraph.

Of course, this is the argument that Arthur Laffer, Alan Reynolds and others have made for years. If you tax the rich too much, they say, the rich will just find loopholes. Tax them less, and they pay more.

Those on the left point out plenty of other instances where higher taxes have increased revenues dramatically – like during the Clinton years.

The IFS doesn’t say all taxes on the rich are bad. They say a better way to raise revenue from the rich would be to have a 40% rate or to impose a new tax on inherited wealth.

Do you think there is an “optimal” rate for taxing the rich in the U.S.?