House Speaker John Boehner has it wrong. Staking out his position this week on negotiations to avoid the fiscal cliff, he said: "You're not going to grow the economy if you raise tax rates on the top — on the top 2 (percent). It'll hurt small businesses. It'll hurt our economy."
History proves this to be false, as this chart, below left, shows. Over the last century, in the entire time there has been a permanent federal income tax, there has been no relationship between the tax rate on the highest earners and the growth of the economy. The economy has steadily grown, as measured by per capita GDP, regardless of whether the top tax rate has fallen or risen.
But those who argue that raising taxes on the rich will be enough to solve the nation's budget issues are also wrong. As this second chart, below right, shows, if the government took every dollar that millionaires earned, it wouldn't be enough to close the budget deficit. Raising taxes on the rich is necessary but not a magic solution.
So raising taxes on the rich does not hurt the economy but won't solve the budget issues. The hard reality is that a long-term solution will require a balanced approach with a combination of higher taxes, tax reform, spending cuts and changes to entitlements. Shared sacrifice is the only way forward.
Throughout history, the tax rate paid by richest hasn't hurt the economy
Don't look for a correlation between economic growth and the highest marginal tax rate, because there isn't one. The nation's wealth has trended upward for a century no matter if the tax rate paid by the rich is high or low.
The red line shows the top marginal tax rate — the highest rate at which income is taxed. It's 35 percent now and has varied tremendously over the century. The threshold for 2012 is $388,350, after all deductions, which means only extra or "marginal" dollars earned above $388,350 are taxed at 35 percent. The blue line shows GDP per capita. Gross domestic product is the output of the U.S. economy in any given year. Divide that by population — how much did the economy produce a year per person — to get a key measure of national wealth.
If millionaires gave the IRS all their income, the deficit wouldn't go away
Take every American who has an income of $1 million or more after taxes, have that citizen turn over every remaining penny to the IRS and, even then, the federal budget deficit wouldn't have been eliminated this year.
Each blue band shows a portion of America's wealthiest earners and the total post-tax income earned by that group. For example, as a group, Americans with post-tax income between $1 million and $2 million made a total of $181 billion in 2010. The total after-tax income of all millionaires is about $709 billion, not nearly enough to close the deficit even if they handed over every last dollar they earned to the federal government. The red band shows this year's federal budget deficit.