A Wealth of Options

posted at 12:11 am on August 3, 2010 by Doctor Zero

Arthur Laffer has a magnificent column in the Wall Street Journal today, concerning the reduction of income to the Treasury which accompanies rising tax rates on the evil rich.  Laffer’s expertise on this subject is legendary, as is his patience for explaining it over and over again, to generations of liberals who refuse to believe it.  One passage from today’s column is especially provocative, and echoes something that’s been on my mind a lot, ever since the beginning of the ObamaCare debate:

These results shouldn’t be surprising. The highest tax bracket income earners, when compared with those people in lower tax brackets, are far more capable of changing their taxable income by hiring lawyers, accountants, deferred income specialists and the like. They can change the location, timing, composition and volume of income to avoid taxation.

In other words, one of the most important differences between The Rich, and the rest of us, is that The Rich have options.

The options for minimizing tax exposure described by Laffer are not available to middle-class taxpayers.  Working stiffs can’t “change the location, timing, composition, and volume of income to avoid taxation.”  At lower tax rates, The Rich do pretty much the same thing everyone else does: aggressively take advantage of deductions to pay as little tax as possible.  As tax rates increase, The Rich pass through a second stage, in which it becomes reasonable to modify their economic behavior to avoid punitive taxation.  These modifications are, by definition, harmful to the overall economy, because they involve taking fewer risks, and generating less taxable income.  Generating taxable income is what The Rich hire you for.

A third stage exists.  The Rich can simply remove themselves from the economy altogether.  Unlike most of us, they can move their business operations, and even their personal residence, on fairly short notice.  They can retire early, as many doctors have spoken of doing, rather than shackle themselves to the lumbering ObamaCare cart. They can find plenty of safe harbors for their money.

Most of The Rich don’t want to do these things.  Contrary to the populist caricature, they don’t enjoy driving gold-plated golf carts through piles of treasure in sealed vaults.  They would prefer to increase their wealth, and the middle class is hungry for their investment dollars.  Beyond a certain point, their focus turns from increasing their fortunes to protecting them.  This is precisely the point at which both public tax revenue, and private sector economic growth, begin to suffer in tandem.

Alternatively, The Rich can use their wealth and influence to manipulate a statist system to their benefit.  A casual review of the news on any given day will reveal numerous examples of such manipulation.  Corruption is not unique to the Obama Administration, but it has increased to historic levels, precisely because the rich and powerful are eager to buy themselves seats behind the controls of the regulatory combine preparing to thresh the rest of us like so much wheat.  It’s no surprise that some of the richest people in the world are high officials in various basket-case People’s Republics.  If you dislike the American upper class now, trust me – you’ll like them even less when they become the nomenklatura.

One option The Rich are prone to exercising in a command economy is using State power to block competition.  The State is very good at destroying companies, especially small ones.  It can block development, prevent the harvesting of resources, impose huge regulatory costs, and shut down industries.  It can raise the price of labor through mandatory benefits, such as health care, or through measures which make it more difficult to hire and fire employees.  Rich corporations, like rich individuals, have options for avoiding and controlling such costs, which are not available to smaller competitors.  Writing in the Wall Street Journal’s “Best of the Web Today,” James Taranto puts it this way:

Big companies have an advantage over small ones in dealing with the destructive effects of government policies. They can move operations overseas, take advantage of economies of scale, and use their vast legal departments to navigate complicated regulations and tax laws. Small companies–which account for the vast majority of job growth–are much more likely simply to wither and die.

Leaving aside the morality of abridging property rights based on income level, and the meaningless puddle this practice has melted our Constitution into, it seems reasonable to conclude there is a sweet spot on the Laffer curve: a point at which tax and regulatory burdens are low enough to encourage the most growth-oriented behavior from wealthy individuals and large corporations, but high enough to generate the income necessary to fund government without running huge deficits.  The government must, in turn, live within its means.  It must be small enough to survive on the funding provided by this optimum rate of taxation.  Obviously, our current federal government has swollen far beyond this size, becoming a tumor that murders its host organism with increasingly frantic demands for greater nourishment.

Soak-the-rich policies are dismal failures, because they rely on controlling the behavior of people who have many options to escape.  The promises of such systems depend on capturing extremely agile dollars.  Those of us with fewer options, and less liquid income, always end up suffering the fallout from these failures.  We live the dusty spaces left behind when billionaires decide not to follow the scripts prepared for them by Washington social engineers.

We’ll suffer again when massive tax increases slam into a recessionary economy, pulverizing everyone except their ostensible targets.  Contrary to the drivel pushed by increasingly nervous liberals, the fatal flaw in our current system is uncontrolled spending, not insufficiently crushing tax burdens.  A system designed to exist in harmony with the voluntary activities of free people would be far less fragile, and its less fortunate citizens would be better served.  The charity of a prosperous nation will always be worth more than the hollow promises of socialists.

Cross-posted at www.doczero.org.

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