Here is an article from CNN.com stating that high tax rates create disincentives. Recently, Word Golf Hall of Famer Phil Mickelson made comments suggesting that he was leaving the state of California due to high taxes.
http://www.cnn.com/2013/01/25/opinion/mccaffery-mickelson-taxes/index.html?hpt=hp_bn7
(CNN) -- Phil Mickelson, aka Lefty, is thinking of
leaving California and perhaps America because, according to his own
reckoning, he is facing tax rates of 62% or 63%. Mickelson, probably the
second-most-famous professional golfer in the world after Tiger Woods,
later backed off from his initial comments about making "drastic
changes."
Reports suggest that Mickelson earned more than $60 million in 2012. In that sense, he appears to be doing better than the Romneys, and perhaps you are not all that sympathetic to him.
The Romneys (remember them?) paid so little tax.
In 2011, Mitt and Ann Romney paid federal taxes of $2 million on
reported income of $14 million, for an effective tax rate of 14%, all
roughly. The Romneys even had to foreswear taking all of their available
charitable deductions to make their tax rate seem so high for
appearance's sake.
It does bear noting that
Mickelson is doing something to earn his $60 million. Whoever is paying
him that much believes that he is worth it. Who are we, really, to
argue?
Mickelson's instinctive reactions to high tax rates, even if his math may be a bit muddled, are sound and sensible ones. Tiger Woods certainly agrees with him.
But that is not the
problem in the story. Lefty faces such seemingly inescapably high tax
rates that he might just pack up his golf bags and leave home. Mitt pays
so little tax that he has to ignore the law to pay a higher rate for
appearance's sake.
How can this be?
The Mitt-Lefty paradox
has a simple explanation: In America, we tax work. And highly. We do not
tax capital or wealth much at all. Indeed, if you have wealth already,
taxes are essentially optional under what I call tax Planning 101, the
simple advice to buy/borrow/die.
In step one, you buy
assets that rise in value without producing cash, such as growth stocks
or real estate. In step two, you borrow to finance your lifestyle. In
step three, you die, and your heirs get your assets, tax free, and with a
"stepped up" basis that eliminates all capital gains. That's it.
Romney, with a personal
fortune estimated at $250 million (his five kids have another $100
million) has figured this out. When he pays taxes, at all, he does so at
the low capital gains rate.
Not so with Lefty.
He is a wage-earner,
albeit a very highly paid one, and he's going to pay over one-half of
his income in taxes if he stays in California. We may not be shedding
any tears for Lefty any more than we feel for Gerard Depardieu,
who recently left France for Russia to escape taxes, or for the Rolling
Stones, who many moons ago left England and recorded Exile on Main
Street from France.
Yet one fact not making
news is that it is still the case that the highest marginal tax rates in
America do not fall on the highest incomes, like Lefty, but on certain
of the working poor, many of them single parents, who are being taxed at
rates approaching 90% as they lose benefits attempting to better
themselves.
It's a "poverty trap"
that works just like the severe marriage penalties for the lower-income
classes. But the working poor do not have the options of going to
Canada, Russia or France.
Lefty has a point --
high tax rates create disincentives. If the rates are high enough,
people react by moving. This should not surprise us: American companies
have been fleeing our shores for years, in droves. Ask Mitt.
But this should worry us, for two reasons.
One, the fact that the
high incomers do flee jurisdictions, or flee from the productive
activity of working, is a bad thing for the U.S.
Two, the very risk that
the rich and famous might leave, aided by the appearance that some do,
holds tax reform hostage. We have struggled to raise rates at all on the
rich, blocked by the mostly mythical Joe the Plumber as much as by the
realities of Mickelson or the Rolling Stones. When we do finally raise
rates, as we did at the fiscal cliff, we do so on the wrong rich, in the
wrong way. Lefty's taxes went up, Mitt's need not.
The problem -- and it is
the same problem as with Mitt's taxes -- is that we are taxing the
wrong thing, in the wrong way. In sum, we tax work, not wealth. This is
backward.
We should be taxing the
act of spending, not the socially beneficial ones of work and savings.
Then we could raise tax rates without fear of ill effects.
Mitt's taxes would go
up, for he is surely spending more than $14 million a year, as by
running for president, and we wouldn't need any special capital gains
preference under a consistent spending tax. Lefty's taxes would go down
to the extent he saves some of his $60 million, helping us all by
working and saving. When and if Mickelson or his kids spend, we could
tax him or them then.
And if Lefty is really
insisting on both earning and spending $60 million a year? Well, I
figure he can buy a lot of borscht in Russia with that.
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