Excellent article here by Ari Fleischer on the shrinking percentage of Americans who pay income taxes. No, it’s not due to evasion. Congress has kept changing the tax code in ways designed to increase “progressivity” — that is, make the wealthy pay more and more of the taxes and eliminating more and more non-wealthy from having to pay anything.
Here’s the money quote: “The problem is that there is a tipping point after which piling taxes onto the rich will leave the government unable to meet its obligations. And perhaps we’re already reaching that point, where most people won’t have a serious stake in what the government does because they don’t pay for it. They want services and benefits, but they don’t pay the price. That’s a formula for runaway spending and no accountability.”
Fleischer points out that we currently have a tax system in which 60 percent of the people can force 40 percent to pay the government’s exorbitant bills — so what’s to keep 90 percent from making the top 10 percent pay it all?
A government that depends very heavily on a fairly small slice of the populace to fund its spending it behaving like an investor who depends on a single stock to provide him with the income he needs. If that stock takes a big earnings hit, his income declines precipitously. Same with government; if a big recession hits (or more accurately, when bad government economic policy triggers another recession), the main impact will be to greatly reduce tax revenues from the wealthy, whose incomes tend to decline dramatically when the market tumbles.
There’s another aspect of this problem: ambitious people with capital aren’t captive here. Britain under Labour governments in the 60s and 70s kept raising tax rates on the wealthy only to find that many of them decided to leave. Entrepreneurship and investment lagged and the economy started going south. The same thing will eventually happen here.
