I was helping one of my kids with a tax return and noticed an amazing refund. The husband and wife had approximately $1,500 withheld from their paychecks for federal income tax. Back when I was their age, getting back half of that amount would have been great. Getting the full amount back would have been incredible. So, how big was their “refund” this year? Would you believe $4,500?

As you might guess, they are not complaining, but I was shocked. Days later I am still in shock. The additional money came from tax credits (credits, not deductions) for having a child, for having jobs (making work pay), and for paying college tuition.

While I agree these are worthy, deserving, well-intentioned credits, I couldn’t help but think about where the government gets the money to be so generous. A quick calculation would suggest that $1,500 came from my kids’ withholding, $2,000 from the 50% of us who pay income tax, and $1,000 from China and others who have enough bad financial sense to loan money to the USA.

How can our government afford to be so generous when it has to borrow $2 for every $5 it spends? The standard answer to our debt is to say we will raise taxes on the rich. Unfortunately, raising taxes does not increase revenues.

An article entitled “Maryland’s Mobile Millionaires” appeared in the March 12, 2010 issue of the Wall Street Journal. The article explained how a tax increase on millionaires designed to increase tax collections had actually lowered the monies collected. For 2008, the year the tax increase was enacted, the number of millionaires in Maryland fell sharply to 5,529 from 7,898. So even though the tax rate went from 4.75% to 6.25%, revenues from millionaires fell by $257 million. Part of the decrease likely came because of the recession, but part of the decrease was due to rich people moving to states with lower tax burdens. Of the millionaires who filed Maryland tax returns in 2007, one in eight did not file a return in 2008.

This is just one example of how raising taxes on the very rich does not increase revenues. As taxes go up, a few rich people will move to another country, but most will make changes to their investment strategies. They just lower their income by moving more of their money to tax-free or tax-deferred investments. Then they wait for the government to learn again that higher tax rates produce lower revenues.

This doesn’t end well. The government will borrow more money in the short term and print more money in the long term. Taxes will go up for everyone. Eventually our lenders will quit lending. Our currency will be significantly devalued. Government services and entitlements will be cut. The pain will be enormous. We will learn again that good intentions may pave a road we do not want to travel. Pete