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Tax thought of the day

I take it that it is best for all to leave each man free to acquire property as fast as he can. Some will get wealthy. I don't believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else. [Applause.] When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor, for his whole life. I am not ashamed to confess that twenty five years ago I was a hired laborer, mauling rails, at work on a flat-boat---just what might happen to any poor man's son! I want every man to have the chance---...---in which he can better his condition ---when he may look forward and hope to be a hired laborer this year and the next, work for himself afterward, and finally to hire men to work for him! That is the true system.

Portion of a speech by Abe Lincoln, New Haven CT, March 6, 1860 (HT: Russell Redenbaugh)

I doubt that many politicians, right or left, would disagree with Lincoln (however, I have my doubts about Obama, since he is an unabashed advocate of income redistribution). Nevertheless, as is the case with monetary policy that seeks to control exchange rates—wherein the more effort expended to keep a currency from falling, the greater the likelihood that it will fall—so it is with incomes policies. The more effort expended to equalize incomes through the use, for example, of standard deductions, earned income tax credits, and progressive taxation rates, the more difficult it becomes for the poor to climb the ladder of success. Most people are in favor of helping the poor become rich, but too often the best of intentions produce unwanted results.

Under highly progressive tax regimes, the marginal tax rate faced by the poorest becomes extremely high as their income increases, thus discouraging greater work effort. At very low levels of income, deductions and tax credits can make effective tax rates negative, but at higher levels of income, those deductions and tax credits disappear, making effective marginal rates much higher than statutory rates. Thus, some of the very poorest can make more money by not working, or by working very little, than by working a lot harder. The moderately poor can see almost all of their increased work effort gobbled up by the tax system. This is the unintended consequence of a progressive tax rate structure: that it makes climbing the wealth ladder extremely difficult, thus locking in poverty those it would seek to help—and in the process, making them more and more dependent on government largess. See an excellent of this here, as it applies to subsidies for healthcare costs under Obamacare.

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