There is one group that can respond quickly and decisively to changes in top tax rates, according to economist Arthur Laffer, chairman of Laffer Associates: the rich.
“The rich can change all sorts of things when it comes to their income,” Laffer said. “A bricklayer can’t.”
For example, the rich can change where they earn their income by moving to a low- or no-tax state, which is what Laffer did when he left California for Tennessee. They can change the timing of their income (defer it or shift it forward), the volume (quit work), and the composition.
OK, but if the government insists on fiddling with top tax rates even though historically it manages to snag a pretty constant share — 18 percent — of gross domestic product, what’s it to me?
It isn’t that simple. “The tax impact of a tax-rate change is not exclusively on the person being taxed,” Laffer said. “How much more the rich pay in taxes is minor. It’s the secondary and tertiary effects that matter.”
What are those effects? Everything from what they spend to how they structure their investment portfolios to whether they invest in new enterprises to how many jobs they create. Remember, “the rich don’t create jobs because it’s good social policy,” Laffer said. “They do it to make money for themselves.”