The Locker Room

Myths about Ďtaxing the richí

Posted by Mitch Kokai at 06:54 AM

If youíre looking for more money to fund government programs, you should raise tax rates on the rich, right? Itís a simple idea. Itís also the theory behind the Obama administrationís discussion of raising rates for taxpayers with incomes of $250,000 or more.

Geoff Colvin exposes an inconvenient truth about that theory in the latest Fortune:

Soaking the rich doesnít stimulate the economy. It only changes who is doing the spending ó the government or private citizens.

Soaking the rich doesnít even seem to increase tax revenues. The top marginal rate has fluctuated wildly over the past 50 years, from 91% to 28%; itís now 35%. But individual tax revenue as a percent of GDP hasnít varied much at all ó it hovers at about 8% ó and its variations donít correlate with the top rate. The reasons are many, but the bottom line is that as government deficits soar to unimagined levels, taxing the rich isnít likely to yield nearly as much as governments are hoping for, and it may not yield anything when the numbers are all totaled.

The best alternative is to rein in spending.

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