In a piece on the Cato Institute website, my friend and Cato Institute director of tax policy, Chris Edwards says the president’s instincts about lowering the corporate tax rate are spot on. However, noises being made in the administration, even by the president himself, about raising taxes on high income earners are not a good sign. Chris explains what could happen if high income earners are hit with even more taxation.
Trump went on to say, “I have wealthy friends that say to me, ‘I don’t mind paying more tax.’” His implication is that tax hikes on high earners would not be damaging because those folks would not take defensive actions.
That suggestion is false. The economic research is clear that the highest earners have the strongest responses to tax changes. Raise their tax rates, and they will work less, invest less, and engage in more wasteful tax avoidance.
Entrepreneurs and other high earners have more flexibility than the rest of us with their working and investing options.
Consider neurosurgeons, whose average salary of $500,000 or more puts them squarely in the top 1 percent. If the government hikes their already-high taxes, some share of them will respond by taking fewer patients and retiring earlier. Why kill yourself working 60 hours a week if the damn government is going to grab half the earnings from your marginal efforts?
Such highly-skilled people add to all of our lives, so when they reduce their productive efforts, we all lose.
Hopefully the Trump comments about the wealthy are just a sideshow. The Republican joint statement yesterday did not mention high-earners, but it did adopt some sound goals for tax reform: cutting business tax rates, allowing more generous write-offs of capital investment, and repatriating some of the vast cache of dollars that U.S. companies are holding abroad.
The joint statement was progress, but now the congressional tax committees need to get cracking and produce detailed bills. Then the House and Senate need to agree on a budget resolution that allows a tax bill to move through the upper chamber with 50 votes.
There are still hurdles, but where there is a will there is a way, and the GOP is showing a strong will to get major tax reform done this year.
Read more here.