The economics behind the issues: Taxing the rich

In last week's Bluegrass Beacon column - authored by our very own Jim Waters, President of the Bluegrass Institute - Waters argues against the sort of nanny-state policies which would keep low-skilled workers from accepting any wage they deem worthwhile for employment, and which would raise the tax burden ever higher on Kentucky's most productive citizens.

While Kentucky legislators are contemplating such proposals in this year's legislative session, a new report from the American Legislative Exchange Council (ALEC) offers further evidence against them which backs Waters' sentiments.

According to the ALEC report, called "Tax Myths Debunked," even if the feds were to raise taxes on the top ten percent of income earners by a whopping ten percent, the increase in revenue would just barely cover one year's worth of servicing U.S. debt - assuming bondholders don't up their required return on investment for our ever-increasing U.S. debt problem.

The report debunks the myth that raising taxes on the rich by ten percent would not harm the economy, in no uncertain terms:

Taxing the incomes of the top 1 percent of taxpayers at this rate would yield only $93.8 billion. These are all taxpayers with incomes above $380,000 or so. Taxing the incomes of the top 5 percent of taxpayers would yield about $180 billion. This would require a tax on all incomes over about $150,000 per year. Taxing those in the top 10 percent of the income distribution at the same rate would raise only $340 billion. This would require bringing the taxable income threshold to about $110,000.

We could apply the same math that ALEC used for taxpayers nationwide to Kentucky taxpayers. If we take the population of the top one percent of Kentucky income earners to be 27,640 (data gathered from the U.S. Census Bureau), and this group's average income per capita to be $759,000 (as per the Institute on Taxation and Economic Policy's report: "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States"), then raising income tax rates by ten percent on Kentucky's most productive group would result in an increase in tax revenue of $2 billion.

To put this in perspective, this would cover just over 3% of Kentucky's total state debt when including outstanding official debt and Kentucky's $30 billion in unfunded pension liabilities. Clearly, raising taxes on the rich isn't the cure-all that tax-hawks claim, especially when considering the disincentives and emigration affects such tax increases encourage.