As Warren Buffet calls for new taxes on the rich to “raise morale” among the middle class, we might want to glance across the pond and learn from the UK’s mistake. I’ve discussed on occasion the French tax rate hike of 75% for all income over £1 million, and the exodus of rich from the country in order to avoid the tax. This is also happening to the state of California. In the 2009/10 fiscal year Great Britain had 16,000 residents who claimed an income of over £1 million.
When Gordan Brown raised their top tax to 50% on earnings over £1 million, the number of million-plus earners dropped to 6,000 causing a loss of £7 billion in revenue. As tax rates increased, the amount of money taken in by government through taxation decreased. Now explain to me, Warren Buffet, how raising the morale of the middle class will close this gap? Explain how we can pay down the deficit and avoid a fiscal cliff with middle class morale? Can morale buy food at the grocery store, or gas at the pump? No, actual improvement of the economy, and continuous increase in the standard of living will raise the morale of the middle class, not vise versa.
When this information was learned, Great Britain responded by lowering the tax rate to 45%, at which point the over £1 million earners in Great Britain shot up to 10,000 which still does not erase all the damage done by raising the tax rate. This is a clear-as-day example of how the behavior of the rich changes when incentives change. Some rich people continued to earn a lot of money, and moved out of Great Britain to avoid half their income being confiscated. Some rich people put their money in places that were less risky, with less payoff, and therefore their annual income fell below £1 million. The point is that people change their behavior when situations change, therefore when tax rates go up, we cannot expect this to happen in a vacuum where everything else stays the same. (Original Article).
Why did the stock market plunge on the day Obama was reelected? Because investors finally accepted the fact that the capital gains tax rate will rise to 20% from 15% with the expiration of the Bush tax cuts. Obama has said that another 5% increase will be levied on capital gains, bringing that rate to 25%. Since investing in stocks is risky, and there is no guarantee that any money will be earned, the payoff of successful investing needs to be enough so that people do not opt for less risky, but less rewarding investments. The dividend tax will also go up to 45%, therefore anyone currently earning money on dividends needs to dump their stock before the new year so that their dividends do not get taxed at 45%, and so that when they sell the stock the gain is not taxed at 25%.
Regulatory burden and uncertain tax rates and new regulations are also contributing to businesses keeping huge cash reserves on hand, because they do not know the true cost of hiring an employee. The liquidation of Hostess most likely happened in part because the sale of the company and assets would be taxed at 15% this year, but 25% next year. Why wouldn’t the investors and owners take the money and run?
We need sane economic policy if we every want the economy to recover. Jealousy is not an economic policy. Hate of the rich, is not an economic policy. Making sure everyone pays their “fair share” to increase middle class morale, is not a sane economic policy, because it will have negative effects on the economy. It’s like the Titanic just hit an iceberg, and the Captain’s recommendation is to just back up, and hit it harder.