First, contrary to Buffett's assertion, people absolutely make decisions and change behavior in response to taxes. Compare the economies of Texas and California, two border states with similar immigrant populations. Texas is a no-income-tax, right-to-work, business-friendly state with substantially less regulation than the Obama-like high-tax (especially on the "the rich" and on business), forced unionism, heavily regulated state of California. Texas also has one of the lowest per-capita spending rates, while California has one of the highest.
The result? According to Investor's Business Daily, state gross domestic product growth in Texas was 3.3 percent in 2011 and 5.2 percent in 2010, while California was 2 percent in 2011 and 1.7 percent in 2010. Texas has created more than twice as many new jobs as California and has a below-the-national-average jobless rate of 6.8 percent. California's unemployment rate is 10.2 percent.
From 2008 to 2011, Texans' median hourly wages rose 8 percent, while Californians' rose 5.7 percent. And per-capita personal income during those years rose 1.3 percent in Texas, while (SET ITAL) falling (END ITAL) almost 1 percent in California. California's poverty rate is 23.5 percent, to Texas' 16.5 percent, and Texas spends less on education, while its students outperform their California counterparts.
Second, because people change behavior in response to taxes, raising them can result in getting less revenue. John Kennedy said, "It is a paradoxical truth that tax rates are too high today and tax revenues are too low -- and the soundest way to raise revenues in the long run is to cut rates now."
The Congressional Budget Office just issued a report on what would happen to the economy if Congress fails to retain the Bush-era tax rates. Keeping the Bush-era rates for all but the rich, the CBO says, adds 1.25 percentage points to GDP. Retaining tax rates for all, including the rich, however, adds 1.5 percent to the economy. In other words, raising taxes on the rich lowers economic output. Does a quarter of a percentage matter? The CBO says it will "only" reduce job growth by about 200,000 jobs -- although other reputable studies put the number at 700,000 jobs.