On soaking the rich
by Jeff Jacoby
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IN APRIL, the British government decided to recoup revenues lost in the current recession by raising the country's top income tax rate from 40 percent to 50 percent. That decision turned out to be a body blow to England's Premier League, the professional soccer association that includes such storied teams as Manchester United and Arsenal.
As Jonathan V. Last recounts in The Weekly Standard, the hike in the tax rate has led top soccer stars to decline lucrative offers to join or remain with England's most celebrated teams. Christiano Ronaldo, Jermaine Pennant, Karim Benzema, and David Villa are among the illustrious players who have spurned the Premier League in order to play in Spain. Why Spain? Because under Spanish tax law, they qualify as "foreign executives," a status that caps their income tax rate at just 24 percent. The tax differential "has become an almost insurmountable advantage for Spanish soccer teams," Last writes, which is why Britain's domination of European soccer is coming to an end.
High taxes can have unwelcome, and unintended, consequences.
Governments delude themselves when they imagine they can easily raise all the money they want by soaking the rich. The rich always have other options. When taxes grow too onerous, high earners can adjust their economic behavior. Some move to Spain to play soccer for La Liga. Others, less glamorously, cut back on their investments, forgo new business opportunities, seek out tax havens, or work fewer hours. The impact is felt not only in lower-than-expected tax revenues, but in lower rates of growth, productivity, and -- since jobs are disproportionately created by those who have money -- job-creation. "You can't have employment and despise employers," Massachusetts Senator Paul Tsongas used to say. "No goose, no golden eggs."
But that isn't the prevailing attitude today in Washington, where the Obama administration and congressional Democrats are playing soak-the-rich with a vengeance.
President Obama, who said last year that he would use the presidency to "spread the wealth around," is seeking to raise the top marginal income tax rate from 35 percent to 39.6 percent, and to collect even more tax revenue by limiting the deductions high earners can take for mortgage interest and charitable contributions. The Democratic health-care bill taking shape on Capitol Hill, meanwhile, calls for even steeper taxes on the well-to-do. To help finance their trillion-dollar health-insurance overhaul, House Democrats are proposing an income surtax on US households earning more than $350,000 a year – a surtax that would boost the top federal rate to 45 percent, higher than it has been in more than 20 years.
The administration justifies such drastic tax increases with class-war rhetoric that is startling in its severity.
"While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not," charges Obama's 2010 budget. "Too many cut corners as they racked up record profits and paid themselves millions of dollars in compensation and bonuses. There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." Accordingly it vows "to restore a basic sense of fairness to the tax code" and to ensure "that the wealthiest pay more."
The belief that the tax code is skewed to benefit the rich is one that many Americans share. When pollsters ask whether high-income people are paying too much, too little, or their fair share in federal taxes, 60 percent or more of respondents routinely answer: too little.
But the data tell a different story.
By any reasonable standard the rich pay far more than their fair share. According to the latest (2007) IRS data, the top 1 percent of US taxpayers earn 22.8 percent of adjusted gross income but pay 40.4 percent of all federal income taxes. By contrast, the bottom 95 percent of taxpayers, who earn 62.5 percent of the income, pay just 39.4 percent of the income tax burden. That bears repeating: The income tax burden of the top 1 percent, who comprise just 1.4 million taxpayers, now exceeds that of the bottom 134 million combined.
While envy and economic resentment make a potent political brew, the hangover it leaves can be fierce. Democrats should resist the clamor to soak the rich. Better instead to remember Paul Tsongas's admonition: "No goose, no golden eggs."
(Jeff Jacoby is a columnist for The Boston Globe. To follow him on Twitter, click here.)