Tuesday, March 30, 2010

The Rich Won't Pay for Obamacare

President Obama and Democrats planned to pay for Obamacare with a series of accounting tricks and new taxes on the rich. The problem, as Alan Reynolds points out, is that this trick won't work.

n short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.

It's amazing how self-interest works. Basically, everybody (or most people) is willing to pay some taxes. But there's a threshhold over which no one willingly pays their taxes. Finding that sweet spot, where tax revenues are their highest, is every politician's greatest problem.

Of course, liberals don't bother looking for the sweet spot where they'll actually get the most tax revenue. For them, redistribution demands the highest tax rates and harshest penalties for "the rich" imaginable. That such tactics often have the opposite effect on revenues seems to escape them. We've been through this before, but apparently, Democrats are slow learners.