Race to the bottom

By Nikhil Rao

Hannah Cohen/College

One of the political happenings that has been at the forefront recently is Barack Obama’s new jobs plan. He wants to inject stimulus to the tune of $447 billion and the Republicans don’t like it. Naturally, most people would want to know where that much money is going to come from. One of Obama’s ideas is what is known as the ‘Buffett Rule,’ after Warren Buffet’s Op/Ed piece “Stop Coddling the Super Rich” in the New York Times about how it is unjust for the rich to be paying a low effective tax rate. It aims to tax millionaires more. Nevada senator Harry Reid has made this more concrete, calling for a ‘surtax’ that would ask millionaires to pay an additional 5 percent in taxes. After looking at some facts, hearing about ‘Occupy Wall Street’ and understanding different perspectives, it all seems to be quite populist.

The argument against tax increases on millionaires is twofold. First of all, the millionaires don’t pay an exorbitant amount compared to others directly below them. For example, the government doled out $1.08 trillion in tax credits last year and only 8 percent of that was for corporations. One of the most talked about loopholes in the tax code is for corporate jets and they account for only .03 percent of the total.

I know people would hate to hear this and I do too, but most of the credits are gobbled up by the upper-middle class. We’ve all heard the conservative view about how the millionaires are creating an abundance of jobs for the American people and how tax increases will just hamper them, but that isn’t true. Small business owners earning around $250,000 are the ones creating jobs, they are the ones receiving a majority of the tax credits and they are the ones who will be hurt the most by tax increases. Obama has said that they will be spared and he has his mind on increased taxes on the millionaires but that will not bring much in revenue.

In terms of generating the most revenue, we could just close loopholes that the upper middle class benefit from and then just raise taxes on them, but that would be counter-productive. The rich pay 45 percent of the income collected by the government and that’s because they have been quite successful in the recent years. People say that they deserve it and shouldn’t be penalized for ‘working harder than others’ but in the aftermath of the Great Recession it’s been said that their profits have come at the expense of the middle class so they should be morally obligated to prop up our 1 percent economy. As much I want to support that, it seems vengeful and is just plain old populism.

The second reason why radically raising taxes may not be the best idea is what is known as ‘The Race to the Bottom.’ For example, let’s look at Britain. Britain has a top marginal tax rate of 50 percent and economists have said that it has negatively impacted their economy. The rich are mobile and can shift their assets or operations to other countries with lower tax rates, or “the bottom.” Many companies are shifting from the United Kingdom and the Euro Zone to Ireland where the corporate tax is 12.5 percent. So you can see that raising taxes on the people who prop up your economy and can also be mobile can have deleterious effects.

It’s quite tricky, really. You can raise taxes to Sweden’s 57 percent and ‘The Race to the Bottom’ will kick in. You can raise taxes marginally in the manner that Harry Reid has proposed and it may bring revenue in, but the small business owners are meatier. But taxing them is definitely detrimental.

Now don’t get me wrong, I’m all for the rich paying more because they can and because I don’t want any increases for me and my family. I’m just saying that the economics may not work out.

Nikhil Rao is a Collegian columnist. He can be reached at [email protected]