April 15 marked Tax Day in the United States and sparked an expected national conversation about the role of government.
One would think the day millions of Americans scramble to send off their returns to the IRS wouldn’t be the most ideal to advocate raising taxes, but many prominent liberal pundits nevertheless called for squeezing “the rich.”
One such voice is Robert Reich, former secretary of labor under the Clinton administration and social media superstar. Reich reposted one of his popular videos on Facebook yesterday listing “three reasons why taxes have to be raised on the richest Americans.”
Reich’s reasons are actually common myths among the left that deserve some serious scrutiny from a free-market perspective.
We have a large budget deficit and need more tax revenue.
With a federal deficit of $468 billion in 2015 and a national debt of $18 trillion, there’s no doubt that the U.S. is in big fiscal trouble. However, this is ultimately a problem of spending, not revenue. That is, the government is in debt because it’s spending beyond its means, not because it’s failing to raise enough money.
In fact, federal revenues have only increased after adjusting for inflation since the end of the Great Recession in 2009. Mandatory spending on entitlement programs like Medicare, Medicaid, and Social Security is out of control, and discretionary spending on bloated bureaucracies like the Department of Defense isn’t much better. The key to fixing America’s deficits is budget reform, not tax hikes.
The rich aren’t paying their fair share.
As if this argument isn’t stale enough, it’s also woefully misguided. The top 10 percent of income earners in the U.S. pay 68 percent of federal income taxes, as of 2011. Is that not more than a “fair share?” Plus, the “top 10 percent” that year was defined as earning an income of $116,623 or above. That’s an impressive salary, no doubt, but it’s not much if you’ve got a wife and two kids to feed plus a house and car mortgage to pay off plus college and retirement to save for. The sad truth is most of “the rich” aren’t as rich as we think.
The rich can afford a tax hike.
Don’t get me wrong, there are many mega-rich tax dodgers out there. However, they pay little as a percentage of their income because of the jungle of tax credits and deductions the government has created, not low rates.
When it comes to business, many corporations refuse to bring profits they earn abroad back to the United States because the federal government would double-tax them due to its “worldwide” system of corporate taxation. This madness is cause for tax reform to make the code simpler and easier to comply with, not tax hikes. Plus, a simpler code would be a win-win for the government and taxpayers, since businesses and the mega-rich would have fewer loopholes to exploit in avoiding taxes.
At the end of the day, incentives matter. Higher taxes cause less economic growth because Americans have less to save, spend, and invest with. It’s Economics 101. Evidence from America’s “laboratories of democracy” — the states — proves this well. Government data consistently show that states with a lower tax burden grow faster by every major economic measure (GDP, population, employment, personal income, etc.).
There’s simply no way to deny it: smaller government equals greater prosperity.