Taxing the Rich

All of the Democrats running for President claim they will pay for their programs by "taxing the rich". What they don’t realize, or at least won’t acknowledge, is that the rich did not get that way by being stupid. If Congress raises the marginal tax rates on the rich, the rich will just spend even more money figuring out ways to avoid taxes. In sort of a corollary to the Laffer Curve, let me suggest this rule: there is a direct relationship between the level of marginal tax rates and the effort spent trying to avoid paying those taxes; i.e., the higher the marginal tax rates, the more money the rich will spend on avoiding taxes – and the fewer taxes they will probably wind up paying.

As just one example, on September 17, 2007 The Wall Street Journal (subscription required) reported on how Lehman Brothers, and other Wall Street investment firms, have used complex derivative transactions to enable hedge funds to get the benefits of owning stocks that pay big dividends without actually having to pay taxes on those dividends.

The details of the transactions are not important. The point is the lengths people will go to to avoid paying taxes if the rates are high enough to make it worth their while to do so.

It is sad how much effort goes into not paying taxes. If we had a simple tax system, with relatively low rates, it would not make sense for people to spend so much time and money trying to avoid taxes. If we could get rid of the loopholes and special treatments and regulations so complicated they make quantum mechanics seem simple (and the balk rule understandable), all these tax advisers could work on something that might actually make our country richer and our people better off.

Until then our real national pastime isn’t baseball, it’s tax avoidance. And that is not a good thing, especially when it is not necessary.