Policy Documents

Seven Myths About Taxing the Rich

Curtis S. Dubay –
August 3, 2009

President Barack Obama plans to raise the top two income tax rates from their current 33 and 35 percent levels to 36 and 39.6 percent, respectively. This would undo the 2001 and 2003 tax cuts for Americans earning more than $250,000 ($200,000 for singles) and return the top rates to the levels of 1993 to 2000 during the Clinton Administration.

In addition to these tax hikes, the House of Representatives' Ways and Means Committee, led by Chairman Charlie Rangel (D-NY), favors another tax to fund the government takeover of the health care system. The "Rangel plan" would levy a 1 percent surtax for married couples earning between $350,000 and $500,000 a year, a 1.5 percent surtax on couple incomes between $500,000 and $1,000,000, and a 5.4 percent surtax for couples earning more than $1,000,000. For singles, the surtax would kick in for earners making more than $280,000 a year, $400,000, and $800,000, respectively. It would be phased in beginning in 2011 and could rise higher in future years if Congress decides it needs more revenue to fund its government-run health care system. Contrary to arguments made by proponents of these tax hikes, tax increases in the early1990s did not lift the economy to the highs experienced later in the decade.

President Obama's and Chairman Rangel's tax hikes would increase the progressivity of the already highly progressive tax code. High-income earners pay substantially higher tax rates than do lower-income earners. If passed, this increased progressivity will damage economic growth by lowering the incentives to work, save, and invest. This will stifle job creation, further slowing the growth of already stagnant wages. 

Those who support this tax increase point to several arguments to boost their case. But when these arguments are scrutinized, it is clear they do not hold up. Tax hikes on the rich will not balance the budget or close deficits. High earners already have a vast majority of the federal income tax burden, and the proposed tax hikes will badly damage the economy at a time when it cannot absorb any new negative shocks.

The President should scrap his plan to hike the top two income tax rates and Chairman Rangel his plan to pile additional tax hikes on high earners. Instead, they should propose to immediately cut spending, including reforming entitlement programs, and extending the 2001 and 2003 tax cuts for all taxpayers. Additionally, they should propose further cutting tax rates to help the ailing economy.