Beware Unintended Consequences

My old friend, Art Laffer (of Laffer Curve fame) often says if you want less of something–tax it.   Economics, the ancient art of encouraging certain behaviors with incentives and discouraging others with penalties is akin to parenting.  We reward good behaviors in our children and–if we are doing our job–we penalize others.   The end result is, we hope, harmony and productivity.  The body politic functions the same way. 

If we follow President Obama’s plan we will continue to place an extraordinary penalty on those who produce the most and, by the way, already pay an inordinate percentage of income taxes.  According to the independent National Taxpayer’s Union, the top 1% of earners in the U.S. pay 36.73% of the tax bill.  The top 5% pay 58.66%.  President Obama wants them to pay more.  Laffer’s view is supported by history–if you want less of something, tax it.  The rich have and always will be able to find ways to minimize income.  Eduardo Saverin, one of Facebook’s founders renounced his U.S. citizenship right before the big payday.  Tax it?  You get less of it. 

We see how tax policy affects behavior if we examine state population growth relative to state tax policy.  As a native Californian–a native San Franciscan to be precise–I know that it takes a great deal to nudge someone out of that glorious state, yet since 1990 the net migration in California has been a negative 3.6 million people (American Council of Engineering Companies among other studies).  Californians pay the second highest state income tax in the nation second only to Hawaii. 

So here we sit, in an election year, hearing that the rich simply aren’t paying enough.  That we can engage in profligate and unaccountable spending on the one hand (has anyone figured out where the $870B stimulus went and what exactly we received for it?) and demand that the most productive among us work harder and pay more. 

For crying out loud, even the Russians have figured out that a flat tax–a uniform rate of tax on the income of individual–makes sense.  And while our citizens pay income taxes of as much as 50% to federal and state governments, the Russian citizen pays a mere 13%. 

Finally, Barron’s reported today that tax avoiders owe the IRS an estimated $385 billion.  That is more than one-third of the U.S. budget deficit.  I would support any president who solves that problem before demanding more of the property of hard-working and law-abiding Americans.  

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3 thoughts on “Beware Unintended Consequences

  1. Tax rates are lower now than they were in the 90s, so I think it’s hard to only look at current rates and say they are unfair and hurt the economy. Also, having two unfunded wars in the ’00s did not help the budget deficit one bit. That’s not quite right – it helped the deficit grow quite large.

  2. So, Bob. You are absolutely right about tax rates for the most part. In 91-93 the top marginal tax rate was 31%, 28% from 1988-1990. But after that 39% and now 35%. But we need to add in state tax, property tax, gas/fuel tax, sales tax, death tax, capital gains tax, and the myriad taxes that are about to hit us with obamacare to get the real picture. I guess you and I disagree as to the purpose of government and the efficiency of government. I would rather and do give my money directly to charity. The cost of government collecting and distributing is excessive and inefficient. Plus the incentives all wrong. That said, I disagree with your subsequent comment–unfunded wars are, in my opinion, a smokescreen argument–the real problem is entitlements. (Though I don’t get why we are still in Afghanistan and no one is talking about the loss of our young men and women.) In 2013 according to the US government only 24% of our budget will be spent on defense and more than half on entitlements. You tell me: which line item is unfunded? $16 T in debt. Yikes.

    Though we disagree, I think the world of you, Bob. We can agree on one though–you did a great job raising your kids and married up to be sure! Are you riding with Mark Brody et al today?

    • Hi Nancy – the real argument point here is a discussion of the role of government – totally agree with that. That policy never gets discussed directly, but only in the abstract when certain budget issues arise. Large entitlement problems never get directly addressed, unfortunately…. I’d really like to see this discussed in some way – certainly it won’t be by Romney or Obama during the campaign (directly, anyway).

      As for the unfunded wars – it’s not a smokescreen argument, rather, i used it to cherry-pick a point. I don’t think other large engagements went unfunded (no tax increase to fund the expense), which is one (and only one) of the reasons the budget is out of whack. It’s a contributor, just like entitlements.

      There is a role for government and I think the success of the US is based on a private-public partnership. People are better off with successful businesses AND government services that benefit everyone. I think we probably disagree on what that looks like in practice. I do think government programs need to be more efficient though.

      And yes – I’m riding with Mark, Randy Davis, Bill Willers and Rob Wisecarver in a bit. I’m hoping to keep up! Time to stretch……

      Have a great weekend!

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