Submitted by Azizonomics [10]
Should The Rich Pay More Taxes?
It’s a multi-dimensional question.
The left says yes — income inequality has soared in recent years [11], and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?
Paul Krugman [12] made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.
Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:
[13]
Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.
This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.
And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:
[14]
So the richest 1% are already contributing around 40% of the tax revenue, taxed on their 34% share [15] of the national income. And even if the Treasury collected every cent the top 1% earned, America would still be running huge deficits. [16]
Yet the Occupy movement are still angry. A large majority of Americans believe the richest should pay more tax. [17] More and more wealthy Americans — starting with Warren Buffett, and most recently Stephen King are demanding to pay more taxes.
King writes [18]:
At a rally in Florida (to support collective bargaining and to express the socialist view that firing teachers with experience was sort of a bad idea), I pointed out that I was paying taxes of roughly 28 percent on my income. My question was, “How come I’m not paying 50?”
How come? Well, the data shows pretty clearly that it’s unlikely that revenues would increase.
They may have a fair point that capital gains above a certain threshold should probably be taxed at the same rate as income, because it is effectively the same thing. And why should government policy encourage investment above labour by taxing one more leniently?
But more simply, people like King think the status quo is unjust far beyond the taxation structure. A lot of people are unemployed:
A lot of people are earning less than they were five years ago:
[19]
28% of homeowners [20] are underwater on their mortgages. Millions of graduates face a mountain of student debt, while stuck in dole queues or in a dead end job like Starbucks.
We live in dark times.
From Reuters [21]:
Nearly 15 percent of people worldwide believe the world will end during their lifetime and 10 percent think the Mayan calendar could signify it will happen in 2012, according to a new poll.
With all this hurt, there’s a lot of anger in society. Those calling for taxing the richest more are not doing the same cost-benefit analysis I am doing that suggests that raising taxes won’t raise more revenue.
But they’re not unfairly looking for a scapegoat, either. While probably the greatest culprits for the problems of recent are in government (Bush, Greenspan, Obama, Bernanke) Americans are right to be mad at the rich.
Why?
This isn’t about tax. This is about jobs, and growth.
The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.
And every month that unemployment remains elevated is another month that the job creators are not doing their job. Every month that the malaise festers, the angrier the 99% gets. It is, I think, in the best interests of the rich to try and create as many jobs and as much wealth as they can. Class warfare is ugly. A divided and angry society, I think, will find it even more difficult to grow and produce.
So raising tax rates is not guaranteed to raise revenues, and cannot address the problem of deficits. America needs the richest Americans to pay more tax dollars — but only as a side-effect of producing more, and creating growth.