Liberal Tax Fantasies Punctured

Some liberals have the unrealistic fantasy that by increasing taxes on the top one percent of the population, the government can finance a radically expanded welfare state for the bottom 99 percent. (Never mind that even if we confiscated the entire annual income of the top one percent, it wouldn’t begin to cover the record, trillion-dollar federal budget deficit.) They assume that somewhere in Europe, there is a country that does just that, without harming its economy. Alas, there is no such country, anymore than unicorns exist.

As Veronique de Rugy of the Mercatus Center recently noted, the U.S. already has a more progressive tax code than most European countries:

The richest 10 percent of U.S. households (those making $112,124 or more) contribute a greater share of taxes (45.1 percent of all income taxes) than their counterparts in any other industrialized nation.

Meanwhile, the average tax burden for the top 10 percent of households in OECD countries is 31.6 percent of the revenue collected, well below the percentage in America.

Interestingly, in France, a notorious welfare-state government, only 28 percent of revenue comes from the top 10 percent of income earners. As for the top 1 percent of Americans, their share of federal taxes paid is roughly 30 percent.

And that’s before a whole host of tax increases and new taxes kick in starting in 2013, such as a new 3.8 percent tax on investment income goes into effect to pay for the 2010 healthcare law. As a leading tax law professor notes, capital gains taxes are going up.  As The Wall Street Journal notes, Obama would like to increase them even further; Obama’s proposals would give the U.S. one of the highest capital gains tax rates in the world — higher than all but one European country:

[Investment] income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.

This double taxation is one reason the U.S. has long had a differential tax rate for capital gains. Another reason is because while taxpayers must pay taxes on their gains, they aren’t allowed to deduct capital losses (beyond $3,000 a year) except against gains in the current year. Capital gains also aren’t indexed for inflation, so a lower rate is intended to offset the effect of inflated gains.

One implication of the Buffett rule is that all millionaire investment income would be taxed at the shareholder level at a minimum rate of 30%, up from 15% today. The tax rate on investment income from corporations would rise to 54.5% from 44.75%, a punitive tax on start-up or expanding businesses.

The new 30% capital gains rate would be the developed world’s third highest . …

Moreover, liberal lawmakers like Jerry McNerney want to raise tax rates even further by imposing a 90 percent tax rate on the wealthy. Liberals seized upon Mitt Romney’s tax returns to try to argue that taxes in America are too low, but it turned out that Romney would have been taxed less in other countries like Canada. (Not only does Romney pay more taxes in America than he would overseas, but Romney actually paid more in taxes than did wealthy liberal lawmakers like John Kerry who give less to charity than the millions that Romney gives.)

Far from being too low, current capital gains taxes are too high, since they tax some people based on essentially fictitious paper income even when those people have become much poorer rather than richer. As we noted earlier, a liberal economist and member of the Federal Reserve Board conceded in 1980 that “most capital gains were not gains of real purchasing power at all, but simply represented the maintenance of principal in an inflationary world.” “Between 1970 and 1980, U.S. stock prices fell by half after being adjusted for inflation. But if you sold stock in 1980, after a decade of getting poorer and poorer you would have had to pay capital gains tax, since inflation made stock prices rise in nominal terms.”

By contrast, some European countries have cut their taxes on investments over the last generation. They did so not because they suddenly developed a love for investors (or the wealthy), but because they found from experience (and the experience of neighboring countries) that doing so yielded more economic growth and investment, and (in some cases) more government revenue.