Economist advises against soaking the rich

From American.com comes an interesting report by Lee Ohanian on the potential flaws in of tax polices that seek to "soak the rich."

Ohanian, a professor of economics at UCLA and director of the Ettinger Family Program in Macroeconomic Research, notes in the article that, "Increasing taxes on capital income goes against current economic thinking on how to finance government spending. Indeed, taxing capital income ultimately hurts the very people it was supposed to help. It reduces investment, which reduces the amount of capital in the economy. A lower capital stock reduces economic growth, productivity, job creation, and wages.

Most studies of taxation, Ohanian argues, suggest that tax reforms should increase tax incentives for savings and investment, and change the tax system so that taxes are used to pay for government services rather than to redistribute income.

Ohanian concludes: "Policymakers frequently underestimate how much taxes will affect economic activity, particularly taxes that target the highest income earners. For example, the Luxury Tax of 1990 was intended to raise revenue from wealthy households by taxing yachts, private aircraft, jewelry, expensive cars, and other big-ticket items. But rather than increase tax revenue, this tax proved to be a net revenue loser. It brought in only half the revenue it was supposed to, because purchases of the taxed luxury items dropped substantially. In fact, the tax crippled the American yacht industry, leading to an estimated loss of 7,600 jobs.

"The lesson is that voters should always be skeptical of tax policies that are designed to soak ‘the rich.’ Such policies invariably wind up hurting all Americans."