Actor Gérard Depardieu's decision to flee France for Belgium to avoid a 75 percent marginal tax rate on incomes above $1.3 million sends a message we here in America should heed: Those who are singled out for tax increases are not stationary targets. The means of avoiding and evading the taxman are legion.

 

U.S. government agencies routinely issue estimates of how changes in the tax code will affect the flow of revenues to the treasury. President Obama says the tax changes he has been seeking will bring in $1.6 trillion over a decade. But such estimates assume taxpayers are something other than human beings who engage in purposive action. People like to keep the money they make—why shouldn't they?—and they typically avail themselves of every legal (and not-so-legal) strategy to do so. Change the tax environment by raising rates or adversely modifying the rules, and taxpayers, especially those in the upper echelons of earners, can be counted on to modify their conduct accordingly; there's no reason to think their wish to hold on to their money has diminished just because the tax code has changed.

 

Economists as far back at J. B. Say and Gustave de Molinari in the 19th century understood this. As Molinari wrote in his 1899 book, The Society of To-morrow, "The laws of fiscal equilibrium set a strict limit to the degree within which it is possible to impose new taxes, or to increase the rates of those already in force. The relative productivity of taxes soon shows when this point has been overstepped, for then returns not only cease to rise, but immediately begin to fall." 

 

Things can work in the other direction too. Other things being equal, cutting tax rates can prompt revenues to rise. This is not to say rising revenue is a good thing. As Milton Friedman once said, if a tax-rate cut brings in more revenue, the rates weren't cut enough. Hear, hear! 

 

Nevertheless, revenues can increase after a rate cut. Case in point: the rate cuts of 2001 and 2003, the so-called Bush tax cuts, which President Obama (until yesterday) had been hoping would expire for the top 2 percent of earners. According to the Congressional Budget Office, revenues increased from $1.9 billion in 2003—when all the cuts kicked in—to $2.3 billion in 2008 (in constant 2005 dollars). At that point the Great Recession hit and of course revenues then fell. Tax revenues always fall in a recession because when people lose their jobs they stop paying the income tax. Companies also pay less as economic activity slows down. When would-be tax raisers today complain that revenues are a smaller percentage of GDP than in previous years, that is the reason. It's not that the tax rates are too low.

 

Leaving recessions out of the account, for the past 60 years federal tax revenues have been rather steady at just under 19 percent GDP regardless of the tax rates. The top income-tax rate has ranged from a low of 28 percent in 1988-90 to a high of 92 percent in 1952-53, yet the flow of money has been a fairly constant proportion of the economy. This would seem to confirm the apparently controversial hypothesis that taxpayers are purposive human beings who can be counted to modify their behavior according to the incentives and disincentives that government places in their paths.

 

Yet most politicians don't get it. In the Wall Street Journal a few years ago, W. Kurt Hauser, formerly of the Hoover Institution, wrote:  

 

 

"Hauser's Law" seems quite robust. Over 60 years, "there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP." 

 

The explanation is simple enough for a child to understand, though politicians have difficulty with it: 

When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.

Hauser shows that GDP grows faster when taxes are lower. "In the six quarters prior to the May 2003 Bush tax cuts, GDP grew at an average annual quarterly rate of 1.8%. In the six quarters following the tax cuts, GDP grew at an average annual quarterly rate of 3.8%. Yet taxes as a share of GDP have remained within a relatively narrow range as a percent of GDP in the entire post-World War II period." 

 

So where does that leave us as we head for the "fiscal cliff"? Obama has backed away from his intention to raise the top 33 and 35 percent tax rates to 36 and 39.6, respectively, on people making over $200,000. Now he says he is willing to have only the top rate raised to 39.6 percent on people making more than $400,000. This, he adds, would raise $1.2 trillion over a decade—again assuming those people are stationary targets.  

 

Republican House Speaker John Boehner has also been seized with the spirit of compromise. From his earlier no-tax-increase position, he is now willing to see the top rate raised on people making over a million dollars. He expects $1 trillion to be raised.

 

 

But in light of the information above, this all appears to be Washington's standard ritual dance. When—or if—the economy recovers from the recession, revenues will rise to their historic level whether or not Congress tampers with the rates. One need not leave the country, à la Depardieu, to escape taxes. But raising the rates in a struggling economy will help assure that the economy keeps struggling.  

 

The tax raisers like to point out that the economy boomed during the Clinton years even though top tax rates went up. But this is a simplistic claim. Many other things were going on at the same time—such as the productivity boom ignited by the desktop computer and information revolution—that offset the higher rates. Economic growth likely would have been even greater had the burden of government been lighter.

 

Alas, the new bipartisan climate in Washington is turning uniformly pro-tax hike. This is sad news, indeed. If taxes can't be cut, at least they shouldn't be raised. First, do no harm! Meanwhile, spending of all kinds must be slashed deeply.

 

Once again, thank you for sending us your e-mails. We can't respond individually, but we read and consider all of them. Send your question, comment, or complaint to john@theprojecttorestoreamerica.com or wendy@theprojecttorestoreamerica.com.

 

Micheal Barone's article of Fiscal Cliff problems not fazing Obama was good as he said, "think Obamacare" — to "finally reduce ... each nation to being nothing more than a herd of timid and industrious animals of which government is the shepherd." The other thing to consider here is Obama and Bernanke know that if the economy heats up, so will inflation (as M2 money starts to move), and it will be much more difficult to control the people (let alone CEO's that spend all their time waiting for what may be next coming from the Government or the Fed than doing what they should be doing). - Jerry (Union, WA) 

 

PS: Just a note to let you know The Republican Party in my county here in Washington State was just taken over by the "Liberty" people. I will be serving as Treasurer on the Board and I at 61 am the only one over about 40 on the Board and we have quite a few young members that are very enthusiastic about The Liberty Movement and what is going on in our county. Just an older guy looking for the truth and this is where it has led me. Most of my friends my age or older are still looking to the government for answers or afraid of a more open Republican Party. I am amazed of the knowledge and awareness of these young folks. JG  

 

Bidwell comment: Jerry, we appreciate your support. The message in your P.S. is one I keep harping on… The motivated and energized faction of the conservative movement is a truth-seeking bunch of young libertarians. I hope more conservatives have the same wisdom and foresight you do.

 

 

Bidwell comment: It is unfortunate every American doesn't understand that every one of us benefits tremendously from the U.S. dollar being the world's reserve currency. The reason we don't pay about eight dollars a gallon for gas like those in the European Union is because the U.S. dollar is the reserve currency. If we go over the fiscal cliff, our credit rating will be downgraded, jeopardizing our status as the world's reserve currency. We will pay twice as much for everything from bread and milk to gasoline. However, I agree with you that going over the fiscal cliff and even losing our status as the world's reserve currency might be the only way real cuts will be made.  

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Sheldon Richman is the vice president of The Future of Freedom Foundation (FFF) and editor of its monthly, Future of Freedom. He is the author of three books published by FFF: Separating School & State: How to Liberate America's Families (1994); Your Money or Your Life: Why We Must Abolish the Income Tax (1999); and Tethered Citizens: Time to Repeal the Welfare State (2001). Previously, Richman was the editor of The Freeman (Foundation for Economic Education), 1997-2012.

The Project to Restore America