A Quiz and Two Rules for the Budget Talks

A Quiz and Two Rules for the Budget TalksBy Clark S. Judge: managing director, White House Writers Group, Inc.; chairman, Pacific Research Institute

OK, class, here’s a quiz.

If the government were to raise the top personal income tax rate by, say, 25 percent, what would be the increase in its take of the total gross domestic product?

Twenty-five percent?

Are you sure?  After all how much of the government’s total personal income tax take actually comes from the top, say, one percent of earners?  OK, it’s not fair to pile question on question, so here is the answer to that question, taken from a recent column by George Mason University economist Walter Williams:
 

According to IRS 2007 data, the richest 1 percent of Americans earned 22 percent of national personal income but paid 40 percent of all personal income taxes. The top 5 percent earned 37 percent and paid 61 percent of personal income tax. The top 10 percent earned 48 percent and paid 71 percent of all personal income taxes. The bottom 50 percent earned 12 percent of personal income but paid just 3 percent of income tax revenues.  (http://tinyurl.com/clhsxsf) 

So, again, class, how much more will the government claim of our GDP, once those who make more pay more?

Stumped? Actually, it is a trick question. The answer is somewhere around zero.  In economic theory, the reason is called the Hauser Rule, after San Francisco financier Kurt Hauser. Some years ago, Hauser asked what has been the historic impact of changes in tax rates on the overall federal tax receipts as a proportion of GDP?  Analyzing tax collections from 1950 on, he found that high tax rates or low tax rates, government receipts consistently fell in a narrow band around 19 percent of GDP.

Do you have trouble seeing how that theory would work, class?  After all, the government charges more, so it must collect more. Right?

Well, not exactly. Consider the case of Eric Schmidt and his company, Google.  Together, they make a lot of money and, yes, they pay a lot of taxes.  Mr. Schmidt is a close associate of President Obama and just this morning is reported to have refused an offer from the president to become the new Treasury Secretary.  Mr. Schmidt agrees with the president on many things, including, we can assume, that the top tax rate on people like him should be raised.

But also this morning there is a Bloomberg report (

http://tinyurl.com/bbd7y6c) that over the last three years Google, presumably in anticipation of increasing tax rates here and abroad, has been shifting its corporate earnings to a Bermuda shell company.  Bermuda has no corporate income tax.  The United States has one of the world’s highest (http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates).

Google has doubled its reported Bermuda revenues over the last three years.  In 2011, the earnings from those revenues totalled 80 percent of Google’s global pre-tax profits.

Bloomberg’s story notes that: “The increase in Google’s revenues routed to Bermuda, disclosed in a Nov. 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the U.S. over corporate tax dodging. Governments in France, the U.K., Italy and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.”

Isn’t that just like government, class?  Always blaming someone else, taking no responsibility for the blunders it makes – like raising tax rates to where an Obama-supporter like Mr. Schmidt is ready to endure the accusations and outrage that politicians and governments will inevitably throw at him in order to protect those who depend on his company’s economic health -- shareholders and employees primarily.

And, class, if Mr. Schmidt is moving money to protect his company from high corporate tax rates, what is he doing to protect himself from rising personal tax rates?

Actually, we have real world examples of what those kinds of high tax rates prompt people to do.

France is preparing to boost its top personal tax rate to seventy-five percent.  This morning the Associated Press reports (http://tinyurl.com/c35sxqj) that French film start Gerard Depardieu, holder of the French Legion of Honor, has established residence in Belgium, where the top tax rate is only fifty percent.

But here’s the thing, class.  Considering the good of society at large, moving is one of the best ways for Mr. Depardieu to respond to rising rates.  Worse would be for him – or you or me or any productive person – to just quit working, or work less, that is to stop or reduce contributing to the world through our labor, because, after all, what’s the point, with the government taking so much more of our earnings.

So as the budget talks continue in Washington, class, maybe the negotiators should keep in mind two rules: first, of course, Hauser’s; second, Hippocrates’, “Do no harm.”

http://www.hughhewitt.com/blog/g/954a4a3c-58d2-4153-8432-3b31df356729