Tax the Rich?
Okay, let me start out by saying that Economics is a subject I know little about. All I have to go off of here is common sense, so this post is more of a question than a statement. But I wanted to bring up and question a conservative principle that I have heard for some time and always thought was fallacious.
I was reminded of all this after reading an article which talked about yet another loophole which allows wealthy people to reduce their tax burden to a point lower than many in the middle class have to pay.
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The conservative argument is: taxes on wealthy people should be low because if you raise them, people will have less motivation to make money. This argument is based upon the Laffer Curve, which in basic principle is a respectable argument–if taxes are set at 0% or 100%, then the government collects nothing (at 100% no one has any incentive to work). Somewhere in between is the optimum taxation rate.
The problem is, it is not as simple a curve as it is expressed at right, especially in a progressive tax system. For example, let’s say you tax a $50,000 salary 20% so the earner takes home $40,000, and you tax a $1,000,000 salary 96%, so the earner takes home $40,000, the return on the greater salary is zero, giving one no incentive to earn more. Such effects don’t fit so neatly on the curve. And when you get out of the extremes, other variables creep so strongly into the equation that it collapses into the snarl seen below Laffer’s curve at right, as illustrated by Martin Gardner.
The argument I am referring to never actually applies to extremes as high as 90%+; while such brackets may have existed in the past, current discussion centers on whether such brackets should be in the 15~50% range. And as Gardner points out, within that range, Laffer’s curve fails to serve as an accurate predictor.
First of all, taxes are never as simple as conservatives portray them in public discussion. You often hear about how people “pay” the top tax amount. However, the top earners never pay 35%, the top bracket today. There is a difference between tax brackets and net taxes paid. People talk about the 35% tax rate, but that doesn’t mean that every dollar of your income is taxed at 35%. You get the first chunk tax-free (deductions), then the next chunk is taxed at 10%, then the next chunk gets taxed at 15%, and so on. And then we have other loopholes, shelters, and dodges, like capital gains tax, which tops out at 15%; a lot of wealthy people make huge portions of their income this way.
But let’s ignore all that for now, and simply focus on the principle itself.
Let’s say that I propose raising taxes so that a person earning more than a million dollars would pay half of their whole income in taxes.
According to the conservative argument, many people would throw up their hands, say “what’s the use?” and not work so hard to make more money. As a result, incomes would drop, and therefore tax revenues would drop.
Somehow I just don’t buy this. I don’t think that people give up money so easily just because they’re not making a bit more more money.
Let’s say that you make $2 million a year and you have, say, 30% taken away in taxes, so you come home with $1.4 million. Then I raise your taxes to 50%; at the 50% tax level, if you make $2 million, then you take home $1 million. You don’t like that, but let’s say you can’t avoid it. Your only choice is to work less or to work more. Will you really be tempted to cut your work levels so that you make $1.8 million and take home $900,000 instead?
I strongly doubt that. Or, if you do, then I think the cause is not the 50% tax bracket, but the desire for less work–that cutting a certain portion of the workload would result in less stress, more free time, etc. Under such circumstances, the same person would likely cut their work levels if the tax rate were zero–the motivation to work less is linked to the desire for free time, not because they get a smaller return than in some other imaginary situation.
After all, people get taxed today, and yet they still work their asses off to make a fortune, or make more of a fortune. Why aren’t more people saying, “Hey, I could be making millions more, but the government takes so much–I could get loads more if the tax rate were half what it is now, so why should I work this hard?”
In fact, I would argue that the motivation factor works in the exact opposite direction to what conservatives argue. And this is my central argument: People who make large incomes are usually highly motivated to make more money. They will not be motivated to make less if the tax rates are higher–if anything, they will be motivated to make more money in order to make up for the loss to taxes.
Think about it. Will you really give up on the chance to make an extra million dollars if the take-home is $500,000 instead of $800,000? You would really deny yourself half a million dollars just because taxes ate up $300,000? Or would you say, “damn the government for eating up that $300,000, but I want/need that $800,000,” and try to find a way to get more?
Then there is the fact that people who make that much money–that is to say, more than they need to live comfortably–tend to be motivated by the desire to make as much money as they can, to succeed as much as they can; these people are the ones who will work even harder should tax rates rise.
There is a threshold at work where at some point, higher taxes start to be counter-productive, and to be certain, it starts at a lot lower than 96%. However, I am pretty sure that it also starts at a lot higher than 35%–today’s top bracket, which means actual tax percentages are a lot lower.
Query for information: is there any resource which lists the actual average tax payments as a percent of total income based on income levels? Say, a list which shows what percent of total income an American taxpayer shells out when making $50,000, $100,000, $500,000, $1 million, and so on? Not just straight-out, assuming standard income only and no application of loopholes or other dodges, but a real-world view? As far as I can tell, that doesn’t exist.
I would think that for any informed debate on tax levels, such a chart would be essential, and well worth the effort it would take to research and calculate it. Which makes me wonder why there might not be one.
I think the argument assumes too much.
J.K. Galbraith said that conservativism is the age old pursuit of trying to justify selfishness, paraphrased.
The wealthy want you to think that, since they place no more burden on infrastructure, they should pay no more burden than anyone else, and therefore progressive taxation is unfair.
A more accurate view should be, they benefit more from our systems, infrastructure and society to they should have to pay more.
More importantly, government and infrastructure has to be paid for or society will collapse. The only people who can pay are the ones that have money. Since the top ten % hold 90% of the wealth and earn 1/3% of the income, they have to pay.
In law school, I studied under one of the only economic historians to receive a nobel prize in Economics: Douglas C. North. We had to read his book “Structure and Change in Economic History.” In the book (between pages 100 and 115) he says the fall of the Roman Empire occurred because of two conditions: the concentration of wealth and power and the wealthy and the powerful using their influence to avoid paying taxes. As a result Rome lacked the means to raise a large enough force to defend itself, despite have the entire resources of the western civilization behind it.
Think of it this way. When threatened by Hannibal, and with direct access to little more than the resources of Italy available to it, Rome sent army after army against Hannibal, and I am talking nearly 100,000 man sized armies. And Hannibal whipped a couple of those armies out, and Rome still found more men, arms and means to throw at Hannibal. Near the end of the Western Empire, Rome couldn’t find the political will and the financial means to raise large enough armies to fight wondering bands of shiftless, landless nomads.
Perhaps the most amazing thing was, the people that had the most to lose, the wealthy and the powerful, were the ones least willing to fund the state that made them that way. The fall of Rome gave way to a multi-centuried dark age.
Here we come full circle to what I mentioned above. The wealthy benefit the most. You don’t need a state to be poor. You can be poor without a state. To be wealthy you need a state, society, infrastructure and government that recognizes and protects property rights.
Now there is an academic community out there that argues otherwise. But the burden of evidence runs against them. First some say that it was the collapse of Rome’s commercial economy that ruin Rome. Well that’s the same thing as the concentration of wealth. We know from our own experience, when wealth concentrates, the mass commercial economy contracts, while the boutique economy expands: thus less cars are made, but more diamonds and luxary yachts are sold.
There’s also Neocon scholarship that’s trying to head these arguments off at the past. Indeed they might, because Constantine the Great, the person who made Christianity the religion of the Roman Empire appears to have been the first Neocon. His goal was to unify the Empire and control the masses with Christianity. He created doctrinal councils to carve out an orthodox theology. But the Neocon coincidences don’t stop there. He also instituted the Latifunde system that tied farm workers as property belonging to the land (serfs) (similar to slaves, except a slave is property tied to a person). This act is probably the one that both caused the collapse of the commercial economy and the concentration of wealth – because once farm workers were made serfs, they were reduced to subsistence wages, causing a massive crash in demand and with it the commercial economy of the Empire. Constantine was almost 2000 years ahead of Leo Strauss and the Neocons.
The other problem is, is that this is such a constantly recurring event in human history that it has to be given the benefit of doubt and the burden of proof must fall squarely on those that would refute it.
After I took the class with North, I took a class in Japanese law. In it I learned that Japan went through a similar event in the middle ages. Wealth and power concentrated into large estates and Buddhist monasteries and these used there power and influence to avoid paying taxes. Unlike Rome, because Japan was an Island Kingdom, it did not fall to some invaders. It simple collapsed into balkanized micro states and endured a shorter, but still multi-centuried dark age.
After that, I saw some show on the History channel where they read ancient Egyptian scripts that suggested that the collapse of Ancient Egypt’s kingdoms (I believe it was either the middle or late kingdoms) occurred because the wealthy found ways and means to avoid paying taxes.
Then their was Byzantium. In 1025 at the Death of Bazil II, Byzantine Empire was the greatest power in the Middle East – and was poised to win back all the lands it had lost to the Arabs 300 years earlier as the Arab domains were balkanizing. But Bazil left no heir, and instead a few wealthy Aristocratic families raided the treasury underfunding the Army (which they feared) and confiscating the lands that were farmed by the citizen soldiers that protected the Anatolian fronteer. Less than 50 years after Bazil’s death, Seljuk Turks from Central Asia, attempting to fill the void of the balkanizing middle east, in an attack on Egypt, sent an ancillary Army against the Byzantine skelleton Army in Anatolia, and completely chased the Byzantines out of Anatolia, necessitating the Crusades but ultimately leading to the down fall of the Byzantine Empire.
The fact is this happens over and over again. It also explains the collapse of Hapsburg Spain, Bourbon France and Romanov Russia, as well as the onset of the Great Depression from Coolege-Hoover America. The later event triggered the rise of Hitler, World War II, the Holocaust, and as Churchill suggest in his “Finest Hour” speech, nearly brought on a new dark age in Western Civilization.
Even today, when we are presented with ‘an existential threat in Iraq’ all the wealthy and power United States can scrape together is 150,000 man Army? The Roman’s through more at Hannibal. Like the collapse of the Byzantine Empire only 50 years after the death of Bazil II. Only 60 years after Roosevelt/Truman conquest of most of the better parts of the world, the United States can’t defend itself from a few paltry terrorist operating out of caves inside the poorest country in the world.
The idea that the wealthy should even pursue avoiding taxes is itself a repeat of a rather insane history.
In the first 30 years after World War II, an era of high taxes and even wealth distribution, global GNP doubled (that’s right in 30 years of liberal policies, the GNP of the world increased more than it had the prior 10,000 years of human history!!!) – the rich got richer, the middle class got richer, everybody got richer and Western Civilization reached its greatest peak only 35 years after avoiding what Churchill called a possible new dark age – Think of all the great technical accomplishments during the years from 1945 to 1975: Landing on the moon, the personal computer, popular music, popular movies, popular musicals, popular operas, (not an especially good era for architecture though) it was a rush of civilization brilliance.
In the years since 1975 what we see is a self imposed turning off of the spigot – largely as a result of the same things that caused the collapse of the Roman Empire: concentration of wealth and the refusal by the wealthy to pay taxes. It’s just plane insane.
As for how taxes are structured, I think you are right. The wealthy complain that they ought to have their acquisition of wealth subsidized. Look if they don’t like paying taxes, then don’t make money. No one has ever decided not to make money because they would have to pay more taxes. But even if they do, as some economist would argue is what happens in France where people rather take more vacation then work more, it helps to broaden wealth. And when wealth is more broadly distributed, then that allows for tax burdens to be more broadly distributed.
For the last 25 years, the Wealthy have captured the lions share of the wealth created by our society. The economy has probably doubled its productivity since 1980 (most of that during Clintons years) yet median family income and workers wages are hardly changed since 1980. If that wealth would have been more broadly distributed, the wealthy wouldn’t have to pay more taxes. It’s that simple.
Finally, I have a friend who told me that the way taxes are structured, that if you had a million dollars, and paid yourself $70,000, you would only have to pay $700 in taxes. That’s because you can pay yourself out of the capital gains which under Bush suffer little taxation. They are already paying close to nothing. Now, according to my friend, that amount would go up every year, but the point is, astuted wealthy people are already getting way too good of a deal for our society and civilization to perpetuate itself.
Its only a matter of time before our way of life collapses if we stay on the present coarse.
The shame of it is, we are perpetuating an incredible amount of missery on millions when we could be doing the opposite at little cost to ourselves, including our wealthy. Its absurdity that is ruling the roost now.
People will still work harder because they want to be able to carry a bigger house mortgage.