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Friday, December 21, 2012

Fairly Taxing the Rich Won't Scare Them Away

Recent research debunks some of the most common arguments against raising taxes on the richest Americans.

Why do so many lawmakers in Congress oppose raising taxes on America's wealthy, even just a little? The answer: We'll never really know for sure.

Lawmakers might oppose tax hikes on the wealthy, for instance, because their rich campaign contributors don't want to pay higher taxes. Or they might oppose bigger tax bills for millionaires simply because they don't want to pay Uncle Sam a cent more of their own high-dollar incomes.

Lawmakers under the influence of either of these motives would, of course, never openly admit to them. How could they — and still survive politically? Simple political reality demands that wealth-friendly lawmakers must solemnly proffer much more noble rationales for why they want to shield rich people's income from higher taxes.

Raising taxes on high incomes, we've been assured since long before the current budget-balancing debate, will discourage small business "job creators." Higher taxes on the rich, we're also told, always backfire and never generate the revenue anticipated.

Do these claims match up with facts on the ground? Northwestern University's Institute for Policy Research earlier this month hosted a congressional briefing that sought to sort out those facts.

The briefing — titled Taxing the Wealthy: What Does the Research Show? — brought top academic tax analysts to Capitol Hill. The analysts had a good many facts to share, to the distinct unease of the apologists for the affluent who stopped by.

What do the facts tell us about those small business "job creators" who'll suffer so, as friends of the fortunate claim, if tax rates on high incomes rise? The facts don't show much potential suffering.

Just under 70 percent of American taxpayers making over $1 million a year, U.S. Treasury Department figures show, do indeed report small business income on their tax returns. But these millionaires who do report small business income average only around 5 percent of their income from small business operations.

In other words, we're talking investment bankers with hobby ranches in Montana. The vast majority of taxpayers making more than $1 million a year aren't small business folks creating good jobs in their own local communities.

But won't those investment bankers just flee to lower-tax pastures if Congress opts to hike the tax rates on their incomes? Won't that exodus just negate the revenue boost that raising taxes on the rich is supposed to create?

Charles Varner, a fellow at Stanford University's Center for the Study of Poverty and Inequality, has been researching what typically happens when governments raise taxes on taxpayers of major means.

Varner and his colleagues looked closely at tax receipts in New Jersey and California after these two states enacted new "millionaire's taxes" in 2004 and 2005. In California, the top tax rate rose from 9.3 to 10.3 percent. After the increase, out-migration of high-income Californians actually fell.

But California, skeptics might argue, occupies a great deal of territory. A deep pocket upset about a tax hike has to travel a good bit to leave California.

True enough, but deep pockets in New Jersey operate in a totally different environment. A New Jersey millionaire who works on Wall Street could easily have chosen to move into lower-tax New York State or Connecticut after New Jersey's millionaire's tax went into effect. A New Jersey millionaire working in Philadelphia could have chosen to relocate in lower-tax Pennsylvania.

But these New Jersey millionaires, in real life, opted overwhelmingly to stay put. Researchers, Stanford's Varney explained at Northwestern University's congressional briefing, have found similar patterns in Canada between provinces with different tax rates and in Switzerland between cantons.

None of this surprises Varney. Moving costs money, he notes. Relocating your stuff costs a lot, and few of us can pick up stakes and move without disrupting our networks of friends and clients.

Varney's basic point: "Economies of place," as he explains, remain "significant even for people at the top of the income distribution."

OtherWords columnist Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest book is The Rich Don't Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class.