What happens as you ratchet up the top rate. A timely explanation of the effect of raising already high tax rates from Megan McArdle:
Taking your tax rate from 5% to 10% decreases your after tax income by 5.26%. But by the time your tax rate is 50%, you’re only keeping half of your income. So increasing the tax rate by 5% decreases your after-tax income by 10%: you used to take home 50 cents out of every dollar, but now you only take home 45 cents.
If you were surprised that Gerard Depardieu decided to leave France rather than pay the new 70% top rate, think of it this way: the rate increase was only 30%, but it was going to cut his income in half. Yes, that would still leave him with more money than you and I live on. But people don’t think this way: if the government came and took half your after-tax income away, that would still leave you with more money than a middle-class family in Bangalore lives on, and you would still be hopping mad, not to mention panicking about how the mortgage was going to get paid. Even if they only took half of your marginal after-tax income away–an extra 50% of every dollar you made over $40,000 say–you would be pretty upset, because you’ve probably already earmarked uses for those dollars.
With the people in the highest-income states already pushing a 50% marginal rate under current law (and also, under what I take to be the negotiation outcome desired by most of the Democratic Party), every 10% tax hike is a 20% decrease in the after-tax value of extra work.
Applying that analysis to Iowa, the combination of the fiscal cliff and the Obamacare 3.8% “net investment income” tax can reduce the after-tax value of additional income of a top-rate Iowa taxpayer by 12.24% — about 1/8. For Iowa businesses that pay their taxes on owner returns — that is, partnerships, LLCs and S corporations — that’s a 1/8 reduction in their cash flow, their ability to finance expansion, their ability to service new debt. It’s also a 1/8 reduction in the returns to taking a chance on a new product, a new location, a new employee. That makes for fewer chances taken.
Worse, soaking the rich doesn’t even begin to solve the spending problem or close the deficit, no matter how hard you try. The rich guy isn’t buying.
Fiscal Cliff Notes
Veronique de Rugy, A Little Symbolism to Fight Fiscal Denial (The Corner)
Cara Griffith, The Promise of Tax Stability (Tax.com). For one company, anyway; tough for the rest of Oregon.
Robert D. Flach, WHAT’S NEW FOR NJ INCOME TAXES FOR 2012
Romney won? How You Can Lose Money on Paper And Still Win at Tax Time Like Romney (TaxGrrrl).
As bad as today’s news is, it could be worse. And it was, actually, as Don Boudreaux reminds us in Cataloging Our Progress: Men’s Business Wear (Cafe Hayek)
Yeah, that’ll work. Man jailed in federal tax fraud, bills paper for using his ‘copyrighted’ name. A convicted tax cheat sent a $6 million invoice to the local paper for using his name twice in a news story reporting his guilty plea on tax charges. Doesn’t he know that if he collects they’ll send him a 1099? (vindy.com)