The Futility of Tax Increases
In the wake of Washington’s unsavory fiscal cliff deal, Americans, unsurprisingly, will be taxed more—particularly wealthier Americans. Politicians have determined that income taxes should be raised on those earning more than $400,000 annually. Other changes—for example, eliminating some deductions and exemptions—could still raise taxes for people making $250,000 or more. Many Americans believe that such tax increases are “good policy” or “fair,” and a good percentage of those Americans are happy for someone else to pay the bill. President Obama has stoked this sentiment.
But get ready: there are several unavoidable problems with increasing tax rates.
One and All
The most important thing to note is that it’s impossible to isolate the costs of any tax. Most people think each person pays his tax, but this is demonstrably false. Whenever government imposes a tax on incomes, employers and employees compete to see who will actually bear that burden. That is, some upper-income workers will negotiate higher salaries or wages. Some employees will be more successful than others in shifting tax burdens to their employers, but employers incur higher labor costs when income taxes rise. Higher labor costs increase the prices of goods and services. Therefore, some percentage of taxes levied against higher earners will be passed on to all consumers—often the least well off.
An omnipotent tax authority could achieve a specific target for increasing taxes on a group. But without such authorities, any tax increase on one group will be shared by everyone. There is nothing that any state official can do to change this fact. Upper income Americans will pay only some part of any increases in “their” tax rates. This important insight is seldom recognized. And it’s just one way that a tax on one is a tax on all.
CONTINUED at FEE. Written by D.W. Mackenzie.