- - Monday, July 18, 2016


Want to reduce cigarette sales? Just raise taxes on cigarettes. Reduce gasoline consumption? Raise gas taxes. Cut carbon emissions? Easy! Just slap a tax on carbon.

This is not to say that these are good policies. Rather, the point is that taxes matter because they change prices. And when prices rise, families, businesses, investors, and entrepreneurs change their behavior accordingly. The greater the price increase, the less people buy.

This principle is not at all controversial. Yet for some reason, the premise does not enjoy the same broad acceptance when it is applied to income taxes, which are an added cost to working, saving, and investing. When taxes rise on these things, you get less of them, which shrinks the economy.

Liberal politicians support hiking taxes on cigarettes, gasoline and other fossil fuels precisely because they know it will reduce consumption of these commodities. Yet at the same they insist we can raise income taxes on the rich without triggering any ill effects on the economy.

They’re wrong, and recently released data from the Congressional Budget Office (CBO) shows why.

Back on New Year’s Day 2013, Congress passed and President Obama signed into law a massive tax increase. Rather than continue all the 2001 and 2003 Bush tax cuts that expired at the end of 2012, they decided to let them lapse for higher earners, thus raising their taxes.

Congress and Mr. Obama also let the then 2-year-old payroll tax holiday expire, raising taxes for all working Americans. Because of this, according to CBO, the total average federal tax rate for all Americans rose from just over 18 percent in 2012 to more than 20 percent in 2013 — a relative increase of 10 percent. But taxes rose the most for high earners. The top 1 percent’s taxes increased almost 19 percent.

The CBO data also show that the before-tax income of upper income taxpayers ticked up sharply from 2011 to 2012, but then plummeted in 2013. This is before-tax income, so the tax increases are not the direct cause.

What likely happened was that high earners shifted as much of their income as they could from 2013 when it would be taxed more into 2012 when it would be taxed less. They can do this because they earn more capital gain and dividend income. They can control the timing and content of that income more than those of us who rely mostly on wages and salaries. Shifting capital gain and dividend income into 2012 would account for the spike in 2012 and part of the decline in their before tax incomes in 2013.

The rest of the decline likely occurred from high earners working and investing less. After all, their incentives for doing those things dropped sharply due to the tax increases. The decline in before-tax incomes indicates this was the case in 2013 and will continue to be going forward. Less working and less investing shrinks the size of the economy, hurting Americans at all income levels by reducing job creation and wage growth.

The CBO data further show that raising taxes on the rich does not reduce income inequality. The shares of total federal taxes paid and the shares of after-tax income earned by the various income groups changed little after the 2013 tax hike.

As the new CBO data demonstrate, if the next president continues to pursue tax increases on the rich, all Americans will feel the pain. High earners will reduce their productive activities even further, in ways that will reduce opportunity at all income levels.

Americans have had enough of that approach. It is time for a new direction on taxes that looks to make everyone better off, rather than taking a pound of flesh from the rich with no gain for the rest of us.

Curtis S. Dubay is a research fellow specializing in tax policy at the Heritage Foundation’s Roe Institute of Economic Policy Studies.

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