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Papering Over Failure--with Your Money

We’ve seen it time and time again, yet we never seem to learn—attempts to solve budget problems by raising tax rates on the wealthy never work.

In England, during the waning term of former Prime Minister Gordon Brown, a new 50 percent tax rate was introduced on those earning more than £1 million. In the year before the new, higher rate was imposed, and at the height of the recession and the financial crisis, more than 16,000 earners reported incomes of over £1 million.

After higher taxes on the wealthy came into effect, the number fell to 6,000. And yesterday it was announced that in the most recent tax year the number of those earning over £1 million had climbed back to just 10,000—still far below the level of several years prior.

Conservative MP Harriett Baldwin says that the tax hike only resulted in a “cull of millionaires,” and that far from raising revenue, the higher rate actually cost the UK £7 billion in lost revenue.

Virtually the same thing happened in the United States in 2008 when the state of Maryland passed a "millionaire's tax." One year later, one-third of Maryland millionaires had disappeared from the state's tax rolls. The tax ended up losing, rather than increasing, revenue from high-income earners.

And it’s happening now in France, where the imposition of a new 75 percent tax rate on high incomes has created a “selling panic” of properties as France’s wealthy are trying to flee the country.

This is the Laffer Curve in action—at some point, high tax rates make investment and productivity less attractive and make tax avoidance more attractive. People respond rationally to the rules of the game as they are dictated—and when you change the rules, expect people to change their behavior.

It’s become almost trite to say it, but it’s true: In the United States, we have a spending problem, not a revenue problem. Over the last 30 years, revenues have constantly risen as a result of economic growth (with the exception of brief recession interludes). If the federal government had kept spending growing on a pace as economic growth, we would have balanced budgets right now, and the debt would be orders of magnitude smaller.

Congress and the president have failed—utterly—to run a government that operates within a reasonable level that the American economy can afford to fund. When they talk about raising taxes, they are just trying to paper over their failures—with your money. And that also will fail.