The Case Against Taxing the Rich: Still Shaky

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The Case Against Taxing the Rich: Still Shaky

The political friends of America’s rich aren’t aiming to convince us that higher taxes on the nation’s highest incomes make no sense. They’re just hoping to keep us distracted.

Why do so many lawmakers in Congress oppose raising taxes on America’s wealthy, even just a little? The answer: We’ll never really know for sure.

Lawmakers might deep down oppose tax hikes on the wealthy, for instance, because their wealthy campaign contributors don’t want to pay any more in taxes. Or they might oppose bigger tax bills for millionaires simply because they don’t want to pay Uncle Sam a cent more of their own million-dollar incomes.

Lawmakers under the influence of either of these motives would, of course, never openly admit to them. How could they — and politically survive? Simple political reality demands that rich people-friendly lawmakers must solemnly proffer much more noble rationales for zealously shielding rich people’s income from taxes.

Raising taxes on high incomes, we’ve been assured since long before the “fiscal cliff” debate, will discourage small business “job creators.” Higher taxes on the rich, we’re told, always backfire and never generate the revenue anticipated.

These claims make for effective sound-bites. But do they match up with facts on the ground? Last week Northwestern University’s Institute for Policy Research hosted a congressional briefing that sought to speak to those facts.

Higher taxes on the rich, we’re told, always backfire and never generate the revenue anticipated.

The briefing — entitled Taxing the Wealthy: What Does the Research Show? — brought to Capitol Hill top academic tax analysts, and these analysts had a good many facts to share, to the distinct unease of the apologists for the awesomely affluent who happened to stop by.

What do the facts tell us about those small business “job creators” who’ll suffer so, as friends of the fortunate claim, if tax rates on high incomes rise? The facts don’t show much potential suffering.

Just under 70 percent of American taxpayers making over $1 million a year, U.S. Treasury Department figures show, do indeed report small business income on their tax returns. But these millionaires who do report small business income average only around 5 percent of their income from small business operations.

In other words, we’re talking investment bankers with hobby ranches in Montana here, not small business folks creating good jobs in their own local communities.

But won’t those investment bankers just flee to lower-tax pastures if Congress opts to hike the tax rates on their incomes? Won’t that exodus just negate the revenue boost that raising taxes on the rich is supposed to create?

Charles Varner, a fellow at Stanford University’s Center for the Study of Poverty and Inequality, has been researching what typically happens when governments raise taxes on taxpayers of major means.

Millionaires who report small business income average only around 5 percent of their income from small business operations.

Varner and his colleagues looked closely at tax receipts in New Jersey and California after these two states enacted new “millionaire’s taxes” in 2004 and 2005. In California, the top tax rate rose from 9.3 to 10.3 percent. After the increase, out-migration of high-income Californians actually fell.

But California, skeptics might argue, occupies a great deal of territory. A deep pocket upset about a tax hike has to travel a good bit to leave California.

True enough, but deep pockets in New Jersey operate in a totally different environment. A New Jersey millionaire who works on Wall Street could easily have chosen to move into lower-tax New York State or Connecticut after New Jersey’s millionaire’s tax went into effect. A New Jersey millionaire working in Philadelphia could have chosen to relocate in lower-tax Pennsylvania.

But these New Jersey millionaires, in real life, opted overwhelmingly to stay put. Researchers, Stanford’s Varney explained at last week’s congressional briefing, have found similar patterns in Canada between provinces with different tax rates and in Switzerland between cantons.

What about the bigger picture? Does an entire nation that raises taxes on the rich risk triggering a rich people’s exodus? France, starting next month, will be levying a 75 percent tax on income over $1 million euros, about $1.28 million. Will high-rollers in France be rushing to end their French connection?

France, starting next month, will be levying a 75 percent tax on income over $1 million euros, about $1.28 million.

Research can help on this question, too, suggests Varney. Tax rates on high incomes do already vary between one European nation and the next, and investigators have closely studied the migratory behavior of one category of European affluent: star professional soccer players.

These soccer stars can ply their trade in any number of countries. They can move from a high-tax nation to a low-tax nation and easily make as much money in their new locale. They may, in fact, be the most mobile mega millionaires on the face of the earth.

These uniquely mobile soccer stars, the research shows, do appear to be sensitive to taxes, but not nearly as “super-sensitive” as might be expected.

And that doesn’t surprise Stanford’s Varney. Moving carries costs, he notes, everything from the monetary cost of having to pick up stakes and shift somewhere else to the social cost of losing easy geographic access to networks of friends and colleagues.

 Varney’s basic point: “Economies of place,” as he noted at last week’s Capitol Hill session on the research around taxing the wealthy, remain “significant even for people at the top of the income distribution.”

Varney doesn’t expect any mass exodus of the wealthy from France after the new year’s 75 percent top French tax rate kicks in. The chances of a mass deep-pocket exit in the United States? Even slimmer. If President Obama gets all of the tax hike he’s now seeking in the “fiscal cliff” negotiations, the top U.S. tax rate will nudge up only to 39.6 percent.

Sam Pizzigati

Sam Pizzigati edits Too Much, the Institute for Policy Study's online weekly newsletter on excess and inequality.

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