Monday, August 09, 2010

Taxing the rich is a bad idea

Dan Mitchell has a good piece on why trying to soak the rich usually just drives the rich away or modifies their behaviour so that the soaking doesn't work. Cutting taxes , even on the rich is a good idea.

Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government? “Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.” …The rich have the luxury to respond to incentives, to opt for more work and less leisure when the return on work is greater. They are motivated to take risks, maybe start a business, invent something, and get even richer while giving others the opportunity, through hiring, to do the same. The opposite is true for low-income workers. When the government raises taxes, someone struggling to put food on the table for his family may have to go out and get a second job to maintain his level of take-home pay. For this socio-economic group, higher taxes translate to more work. To ignore evidence that the rich behave differently is silly. The government can’t get more blood from a stone, yet it keeps trying. Instead of demagoguing tax cuts for the rich, Democrats should try embracing them for a change.

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