Daniel J. Mitchell

Whether it’s through the Buffett Rule, higher income-tax rates or double taxation of dividends and capital gains, President Obama often demands that “rich” taxpayers and big corporations send more money to Washington.

But as Americans pay their taxes by today’s deadline, we might note that trying to get more money from upper-income taxpayers is like playing whack-a-mole. So long as tax rates are high, rich people will figure out ways to protect their income.

It doesn’t take a tax genius; any rich person can make a phone call or hit a few computer keys and shift his or her investments to tax-free municipal bonds. It’s not good for the economy when capital gets diverted to help finance the excess spending of Detroit or California, but it’s an effective way of stiff-arming the IRS.

"Work, production, saving and investment are how we generate national income, so it doesn't make sense to discourage taxable income with higher tax rates."

Or the rich can play the green-energy scam, getting all sorts of credits to offset their tax liabilities. That’s one way General Electric made lots of money and kept it all for shareholders.

Statists often will respond by arguing that we should reform the tax code. But instead of a flat tax, which would rid us of loopholes and would lower tax rates, they just want to end the loopholes and keep tax rates high — or raise them even higher.

Even if lawmakers abolished the various tax-code distortions, they might still be disappointed. The one sure way for rich people to lower their tax bills is by generating less income.

Here’s a quick economics lesson for the class-warfare crowd: When the government taxes income, it raises the price of work compared to leisure. And because the tax code penalizes capital gains with higher rates, it also raises the price of saving and investment compared to consumption.

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.

More by Daniel J. Mitchell

Daniel J. Mitchell

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.
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