6/8/2010 – Robert Frank –
In his Wall Street Journal op-ed Monday, famed supply-sider Arthur Laffer argues that higher taxes on the wealthy rarely work because the wealthy simply shift their income.
President Obama’s upcoming tax increases, he says, are encouraging the wealthy to take cash and income off the table this year, robbing from next year’s growth and spending. As a result, he says “The economy will collapse in 2011.”
Many argue with Mr. Laffer’s account of history and his premise. Still, there is evidence to support his argument that the wealthy are front-loading their income in 2010 in anticipation of higher rates next year.
Take Eddie Lampert. According to a Bloomberg article, the billionaire’s hedge fund has just distributed to him about $829 million of stock in Sears Holdings, AutoNation and AutoZone.
Whatever his motivation, by taking the stock now he would be taxed at the current capital gains rate of 15%. Under proposed legislation in Congress, any gains from the same move next year would fall under a new, higher ordinary-income tax rate of 39.6%.
“It’s totally an astute thing to do,” said Robert Willens, a New York tax expert who works for Wall Street clients. “It doesn’t take a fortune teller to predict that we are going to see a lot of this activity between now and the end of the year.”
Of course, few but the very wealthy have the ability to shift their tax burdens. Even among the wealthy, it is mainly business owners or investors who earn their income through capital gains or dividends who can play with their reported income. So not everyone who’s rich will be avoiding the taxes.
Still, as Mr. Willens and Mr. Laffer both suggest, next year’s tax increases on the wealthy may bear less fruit that Washington expects.
How much of an impact do you think income-shifting will have on 2011 tax receipts?