When taxes are high, people refuse to comply.
A common rallying cry on the left is that we can fund our social programs if we just “tax the rich.” While popular, this slogan is far from a real solution for the country. As has been pointed out elsewhere, if you confiscated all the wealth of every billionaire in the United States, you wouldn’t even have enough money to run the government for a year. Our fiscal problem is a spending issue, not a revenue issue.
However, this isn’t the only problem with the proposal. It turns out that “tax the rich” is easier said than done.
A new working paper put out by the National Bureau of Economic Research (NBER) examines the impact of a tax system targeted at the rich. Researchers Nicolas Ajzenman, Guillermo Cruces, Ricardo Perez-Truglia, Darío Tortarolo, and Gonzalo Vazquez-Bare examine a new progressive property tax in Tres de Febrero (a city in Argentina), a system that effectively increased taxes on the rich while decreasing taxes on the poor.
How does this study show an issue with tax-the-rich sloganeering? To understand, we’ll have to consider the work of economist Art Laffer.
The Real Political Economy of Taxes
It’s simple to say, “I want to increase taxes on the rich.” Art Laffer’s work highlights how that desire may be easy to hold but hard to implement.
Laffer was famous for plotting a curve (famously called the Laffer curve) that showed the relationship between tax rates and tax revenues. Laffer’s insight was simple: as tax rates increase, tax revenues increase—at first. However, once tax rates go high enough, people are increasingly incentivized to avoid paying them, with the result being that tax revenues might actually start going down as rates go up. In other words, a tax rate of, say, 40 percent, might bring in more money to the government than a rate of 60 percent.
