Friday, December 7, 2012

Simon Cowan: Will taxes on the super-rich solve budget woes?

Governments around the world are being dragged, in some cases kicking and screaming, into doing something about their budget deficits. The difficulty is that the public will neither pay more tax nor countenance any cuts to entitlements and services. Hence, recent state budgets have been using euphemisms such as ‘efficiency dividends’ and ‘trimming the fat,’ while senior politicians rush to reassure electorates that public service job losses will not affect frontline services.

However, such cloak-and-dagger methods can take you only so far, especially if (like the United States) you’ve got a trillion-dollar hole to fill. Perhaps, the thinking goes, where dissembling fails envy might succeed. After all, everyone knows that the super-rich are rorting the tax system; all we need to do is raise their taxes so they pay ‘their fair share’ and everything will be OK, right?
In reality, it doesn’t work like that.

First, raising tax rates doesn’t necessarily increase tax revenues because of the disincentive effect taxes have on economic activity. Higher taxes may decrease economic activity and so may actually lower the overall tax take. Both a zero per cent tax rate and 100% tax rate will generate no revenues.

Second, we operate in a global marketplace where people and money can move around freely.

When new French President Fran├žois Hollande backed a 75% tax rate on those earning more than €1 million earlier this year, wealthy French families started moving to other countries. Similarly, almost two-thirds of the people earning more than £1 million a year left Britain when the top tax rate was raised to 50% in 2010/11.

Third, the revenue gained from tax hikes on high income earners is not enough to fix fiscal profligacy. In the United States, where the budget deficit exceeds $1 trillion a year, President Obama’s proposed tax plan (which increases tax rates for the rich and reduces deductions) will only raise $1.56 trillion over 10 years.

This is barely 15% of what is needed to close the budget gap. Higher taxes on the wealthy (however righteous they feel to some) are simply not the answer.

What is needed to balance budgets in the United States, Europe and Australia is a reform of reckless, poorly targeted spending, the replacement of inefficient taxes (and tax deductions) with efficient ones, and structural reform to reduce the churn of middle-class welfare. Budgetary reform is economic reform, and the key theme must be restoring efficiency.

It’s time to cease trumpeting weasel words and unfunded promises, end the largesse for special interest groups, and forget the politics of envy. It’s time to get serious about the economy.

Simon Cowan is a Research Fellow at The Centre for Independent Studies.


Auntie Podes said...

It is true that some, though by no means all, rich people contribute to society considerably by way of their business and financial activities. They produce goods we need or wish to own, employment and other ways. However, it is also true that many manage to pay very little in taxation. In so far as they pay less than those in a position where they cannot avoid paying taxes, this is clearly an injustice. They ought, morally, to pay their fair share - but this does not mean they should be paying at a higher rate than the rest. In any case, even if they are taxed at a higher rate, this will not "balance the gummints books" for them. It is the fault of politicians that the electorate has come to expect them to provide all sorts of benefits and allowances beyond their ability to fund them. Many appear to imagine that there is a bottomless pit of wealth from which the gummint can dip into to cater to their every whim. There is no such pit and neither does money grow on trees. It is the hard-earned reward for productive endeavour by individuals who are entitled to the fruits of their labour - not for doling-out to those who make no effort to provide for themselves.

Dorothy said...

I truly agree. There has to be a change in the mindset of those who have become used to having others provide everything for them .The big question is how do you turn them around? Many of those who are unemployed because they either are unfit for work or there are at present no jobs they are capable of doing still will not learn how to help themselves in any way.Do they grow their own vegetables with all their spare time? Use their hands to make something to save money? That is why we are so in debt.We are handing it out to many who do nothing all day but get up to mischief and cause even further expense for us all in extra policing,medical costs, repairs and maintenance of public property that has been vandalised etc etc because they are bored and not tired because they haven't anything to do all day.

Ray S said...

Somebody out there more intelligent than me may be able to answer me why printing more money wont solve a few problems. After all, the numbers all become meaningless after a while.
I predict that the present financial system (capitalism) will ultimately fail, not perhaps in my lifetime, but certainly will fail.
When money is put before all other considerations, ie health, law & order, education, defence. The system must eventually fail.