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The topic of tax increases is again very much in the news, and it is a topic that I have devoted my Defining Ideas column to this week.
President Obama has just announced his intention to put forward yet another tax plan to close tax loopholes and increase the marginal rates on the rich, which he now restricts to persons whose income is $1 million or more a year. In order to lend legitimacy to this campaign, he has chosen to invoke the confessions of Warren Buffett to justify his proposal. After all, if one of the richest of men alive is willing to accept tax increases on the rich, how could any mere millionaire oppose that position?
Mr. Buffet and the president are not alone in their determined inability to understand how economic systems work. Many people think that increasing tax rates on the rich will not negatively affect the economy. As one critic put it to me bluntly over coffee, “do you think that an increase in the marginal tax rate from 35 to 37 percent will change anyone’s behavior?” His next sentence was, in its entirety, “Get real!”
People assume that we are always at a point where there will be no reduction in output for any small increase in tax rates. But this point has to be wrong. Just consider the basic laws of supply and demand. I explain further over at Defining Ideas. Published in