Thursday, December 22, 2011

Ayres & Edlin Tax Plan Would Drown Everyone on Board

Tax law professors Ian Ayres and Aaron Edlin recently wrote a New York Times op-ed outlining the most disturbing proposal that I've read in a long time: they advocate a 100 percent tax rate on all income that exceeds 36 times the median household income.

In 2006, the median American household income was $50,233. This proposal would therefore cap income for that year at $1,808,388–certainly no small chunk of change. However, the Ayres-Edlin proposal is an absolutely terrible idea that would cost us economic growth, tax revenue, and economic liberty.

First, history teaches us that excessive taxation actually lowers tax revenue. A cursory glance at income tax statistics shows that federal tax revenue was higher in the 1980s than the 1970s. This is interesting because (1) the 1970s was a highly inflationary era, and (2) the Reagan tax cuts slashed the top marginal rate from 70 percent to as low as 28 percent.

Of course, this shouldn't be surprising. Punitive taxation disincentivizes economic productivity; indeed, common sense dictates that people will not work for nothing, as the Ayres-Edlin proposal requires after an individual (or business) earns more than their income limit. Additionally, punitive tax rates incentivize various forms of evasion (some legal, some not). Even if you're a statist, shouldn't you want the rich to earn a whole lot of money that the government can tax? Incentivizing productivity yields higher economic growth and larger tax returns, so everyone wins by allowing "the one percent" to do their damn jobs.

The other problem with the proposal is the arrogance that Ayres and Edlin–or anyone else–has either the clairvoyance or the moral imperative to dictate how much money is too much for one person to earn. Wealth accrues in a market economy through a multitude of individual, voluntary transactions. To chide someone for being too successful strikes me as jealousy wrapped in an egalitarian facade.

I can't conclude without pointing out the absurdity of their statement that "The sky is the limit for the rich as long as the 'rising tide lifts all boats.'" Ayres and Edlin, of course, are borrowing President Kennedy's justification for slashing the top marginal rates. President Kennedy knew that everyone would benefit by allowing the rich to keep–and invest–more of their income. Perhaps, then, a more appropriate metaphor for Ayres and Edlin is that a sinking ship drowns everyone on board.

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