Daily Austerity Watch: Rich People Can Withstand Tax Increases

Daily Austerity Watch learned long ago that there lies, damned lies and lies about taxes. One of the most often-told tales involves the notion that when the going gets tough (taxes rise), the tough get going (the rich high-tail it out-of-town).   The problem with this theory, however, is that it may not be true.

Research done in New Jersey, where complaining about high taxes is as much a part of the culture as Bruce Springsteen and the Atlantic City Boardwalk,  shows that the rich are not scared of rising taxes.   In 2004,  New Jersey officials imposed a “millionaires tax” on residents earning $500,000 or more a year raising rates  from 6.37% to 8.97%. The world did not come to an end. In fact, nothing much happened at all.

“The study found that the overall population of millionaires increased during the tax period,” according to the Wall Street Journal. “Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.”

Interestingly, New Jersey Gov. Chris Christie (R),  like all fiscal conservatives argues that the worst possible thing that the  government can do during an economic slowdown is to raise taxes.   Last year, he vetoed the so-called Millionaire’s Tax Increase.

This issue is rearing its head in the halls of  Congress.  President Obama’s Fiscal 2012 proposed budget calls for raising taxes on those earning $250,000 a year.  Democrats complained bitterly last year when Obama agreed to extend the Bush Tax Cuts even though they caused the deficit to mushroom.  Just like before,  Republicans in Congress are adamantly opposed to any tax increases.   This is one of the reasons why Congress remains hopelessly deadlocked on fiscal policy.

Anti-tax zealots miss a big point.   Much of income that rich people earn comes from tax-free sources such as municipal bonds.  They also use an armada of accountants that enable them to pay the least amount to Uncle Sam as possible.    Remember, nearly 1,000 millionaires paid nothing to the IRS in 2007, the last year data was available.

The other problem with giving tax breaks to the rich is that there is no evidence that it works.    Rich people who get tax breaks may wind up putting their additional wealth into tax-free investments, or perhaps send it off-shore away from the prying eyes of Uncle Sam.

Many of the corporations that complain bitterly about high U.S. corporate tax rates often pay much lower effective rights thanks to the sophisticated — and entirely legal — methods that they use to lower their tax liabilities.   A fair number of tax breaks given to industries — such as filmmakers — never generate the bang for the buck that their supporters claim.  Companies are able to play states against one another to extract the best deal for themselves. Who can blame them?

The New Jersey research underscores the need for a frank, honest discussion about taxes as members of Congress debate how to tackle the nation’s growing deficit.   Tax increases are not fun and government should spend its money responsibly.   Rich people, though, are resilient enough to withstand any increased demands from the IRS.

–Jonathan Berr