Arthur Laffer: The Soak-the-Rich Catch-22

Posted By on August 2, 2010

Arthur Laffer wrote another piece in the WSJ that again draws attention to the focus some in congress are promoting — “tax the rich.” America would be wise to pay attention to previous administrations and history before once again heading down the path of high taxes and even higher taxes on the rich. Our country pays a high price for this repeated practice in extending a recession/depression, weakening job recovery and focusing investors in America to wealth preservation strategies including exporting their dollars. To generate a vibrant economy is to attract capital, stimulate expansion and grow our economy.

We all know that there are lots of factors influencing tax revenues from the rich, but the number one factor has to be the statutory tax rates government tells the rich they have to pay. Not only do the direct income tax consequences of higher tax rates on those in the highest brackets lead to higher deficits, the indirect effects magnify the tax revenue losses many fold.

As a result of higher tax rates on those people in the highest tax brackets, there will be less employment, output, sales, profits and capital gains—all leading to lower payrolls and lower total tax receipts. There will also be higher unemployment, poverty and lower incomes, all of which require more government spending. It’s a Catch-22.

Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that well-trained economists should know to avoid.

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