This is a very interesting opinion piece done in the WSJ. It specifically shows some of the historical trends in the tax cuts and tax hikes and how the desired effect has usually been the opposite of what many assume would happen. Cutting rates on the top brackets usually creates a higher percentage of tax revenue for the government than an increase. This is because the tax becomes a marginalized aspect of the economic decision. A saying that my professor at Florida was always fond of saying was that you cannot let the tax tail wag the economic dog. However, when you are looking at 50% or more tax as a consequence of a transaction, that tail gets very big and can dictate whether the transaction ever takes place. As our tax system relies on realization events, ie sales and mergers, if those transactions never take place, there is no tax consequence, thus no revenue for the government. It should be noted, that when fears during 2009 took hold and transactions slowed to a trickle, the revenue to the government from tax activities dropped $400 Billion from $2.7 trillion to $2.3 trillion. See the TIGTA report from last week for details.
The issue that many of us face is that with deficits so high, can we afford to not increase taxes? The problem under historical analysis, is that by only increasing the rates, those in the top earning brackets will change their behavior to minimize their tax consequences and there is little to stop it from an enforcement perspective.
I know many of those tricks, and if you would like to speak with me about how to arrange your affairs to minimize your tax liabilities, we could change the way you pay taxes too.
WSJ: The Soak-The-Rich Catch-22
TIGTA: Trends in Compliance Activities through Fiscal Year 2009
Special thanks to the TaxProfBlog @ http://taxprof.typepad.com/ for the links to the news stories.
