Here in America we’re having a fierce national debate about whether or not tax increases should be a part our deficit and debt reduction efforts. Personally, I’m not sure why we need to raise taxes. Federal revenues are actually up 19% since 2009.
But setting that aside, we shouldn’t assuming that raising tax rates (especially on economically mobile citizens like “the rich”) will automatically result in a lot of new revenues. After all, that’s not how it worked out in Europe:
In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.
This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election. …
George Osborne, the Chancellor, announced in the Budget earlier this year that the 50p top rate will be reduced to 45p from next April.
Since the announcement, the number of people declaring annual incomes of more than £1 million has risen to 10,000. …
Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.
Laws are static. Markets are dynamic.
Taxes and regulations change people’s behavior. Taxes, especially, inspire people to try and avoid paying them. And when you’re taxing “the rich,” people who have a lot of means at their disposal through which to shelter or move their fortunes, you’re going to get a lot of avoidance.
Which is why, historically, the United States hasn’t been able to collect much about 18% – 19% of GDP in tax revenues no matter how high tax rates are raised.
In the market place, if you create too high of a barrier between consumers and a product they want through taxes or regulation what you get is a black market of products avoiding the taxes/regulations. It works the same way with the tax code. Once you raise taxes beyond a certain point people begin to find ways – be they legal or illegal – to avoid those taxes.
If we want a balanced budget, the government must live within it’s ability to raise revenue. And it’s very clear from historical trends that 18 – 19% of GDP is about all the revenue the government can hope to squeeze out of us.