Millionaire Hillary Clinton and billionaire Warren Buffet met in Omaha earlier this month to trumpet higher income tax rates on upper income earners. Ignoring the data, the two super-rich, joined by income laggards Dallas Maverick owner Mark Cuban and former New York Mayor Michael Bloomberg, argue that levying higher tax burdens on workers in the top income bracket will reduce income inequality.
However between 1980 and 2013 when income inequality, as measured by the Gini Coefficient expanded by 22.2%, the share of federal income taxes paid by the highest one-fifth of earners rose from 64.7% to 88.0% while the share paid by the lowest one-fifth declined from +0.1% to -4.0% (i.e. tax rebates greater than tax payments). Even the middle income’s share dropped from 10.7% to 3.9% over the 33 years.
The reasons that taxing high income individuals more heavily does not reduce income inequality are that excessively high tax rates on high income:
1) discourage individuals from pursing higher education and training to increase income;
2) encourage individuals to reduce work efforts and to increase leisure activity;
3) restrain small business formation and risk taking by entrepreneurs seeking greater financial returns;
4) incentivize individuals to spend excessively on goods and services that are deductible from taxes and;
5) encourage high income individuals to move to lower tax nations.
But unfortunately for the economy, envy economics, as evidenced in Omaha in August, remains a viable political tool by generating votes and self-righteous smugness from its devotees.