Saturday, December 8, 2012

Why the rich should pay more taxes

The annual budget irresolution is getting to be like an ABC Family Channel Christmas special: You don’t want to watch because, no matter how it turns out, you know it’s gonna be bad. This year is even worse than the last two years because both the White House and House Republicans are playing chicken at the edge of the fiscal cliff.

Republicans have now pretty much conceded that nothing will be resolved without tax hikes of some sort and that the extra tax burden will have to fall upon the rich. So they’re willing to accept a deal that leaves the Bush cuts in place for families under $250k while allowing the Clinton levels to come back on everyone above that mark. This concession isn’t coming for free, though: they want entitlement cuts to be part of the bargain.

How likely are the Republicans to get what they want? Not very likely. Louisiana Gov. Bobby Jindal, writing in Politico, notes sardonically, “At present, any reading of the headlines over the past week indicates that Republicans are fighting to protect the rich and cut benefits for seniors. It may be possible to have worse political positioning than that, but I’m not sure how.”

Defense (blue) and Transfer Payments (red) as Percentage of GDP
This is something of an exaggeration … but not by much. Transfer payments by themselves consume 89% of federal receipts, and of that remarkable number about 74% is composed of Social Security, Medicare and Medicaid payments.[1] However, these three programs alone contribute 11.11% to our gross domestic product, while federal transfer payments overall contribute 15.12% to our GDP. (By contrast, defense spending is only about 5.44%.) Granting that these three programs have been extended far beyond their original parameters, they’re still entitlements to which — having paid into them for so long — the people really are entitled.

One possible compromise on the tax issue is a mix of two suggestions. President Obama has indicated that, while a tax rise on the wealthiest 2% must be part of the final deal, he’s willing to flex a little on the exact amount … say, split the difference between the Clinton-era 39.6% and the current 35%, and make it 37.5%. The other is an idea floated by Sen. Chuck Schumer (D-NY) and — yes, I’ll say her name — House Minority Leader Nancy Pelosi (D-CA) to create a new, higher bracket for people earning $1 million or more.

Cue the whining. Yes, the top 20% pay almost 2/3rds of the nation’s taxes, which seems like they’re being penalized for their hard work and good luck. But they also possess about 89% of the nation’s net worth and 95% of our financial wealth.[2] Why is this? Because the richer you get, the smaller the proportion of your disposable income spent on consumption.

As your income increases, you may spend more on quality, but not necessarily on quantity; for instance, you may start buying tailored suits from Hart, Schaffner and Marx, but you won’t necessarily buy more than you did when you were getting them off the rack from Burlington Coat Factory or J. C. Penney. And a dozen eggs cost the same whether it’s you buying them or your servant. Your marginal propensity to save, which you could once only exercise through clipping coupons and bargain-hunting, now gets exercised through 401(k) plans, whole-life policies, money-market accounts, and Ameritrade.

Good, fine and dandy. There’s a place in the world for investors and investment. However, it’s consumption that drives economic growth. While a certain amount of income inequality is going to happen under any system imaginable, the bigger the share of the country’s wealth that’s concentrated at the top, the harder it becomes for those in the lower tiers to do the consuming necessary to support the system. That, incidentally, is why money from programs such as SNAP and WIC are called transfer payments: they exist in part to counteract the tendency of money to trickle up to the top by transferring it back down.

Yeah, sure, increased taxes are historically recessive, but not necessarily or permanently; it could also be taken as a positive signal that we’re getting our act together. But remember the earlier numbers: the rich should pay more into the system because they get more out of the system.  It’s not surprising rich people — well, other than Warren Buffett — tend to prefer a flat tax; it’s much like the high-maintenance female friend who gets you to agree to go halfsies on dinner, then orders the lobster thermidor aux crevettes while you resign yourself to a grilled cheese sandwich and tomato soup.

Federal Spending as Percentage GDP
There’s one other thing to consider: The federal government, considered as a single entity, is the single largest consumer in the market. In the third quarter alone, Washington accounted for 24.55% of GDP, an amount that covers everything from jet fighters to veteran education benefits to toilet paper for National Park bathrooms and ball-point pens for the GAO. There are a lot of rich people who wouldn’t be so rich if Washington didn’t spend so much on so many different things, not just through the purchase of consumables and services or the funding of subsidies and grants, but also indirectly — through the quotidian purchases from the salaries of just under 2.8 million government employees (which is about 0.89% of the population, about half what it was sixty years ago).

Not to mention purchases of goods and services through transfer payments.

This is just one more way the upper income brackets benefit more from the government than does anyone else.

I’m not arguing for the 87% effective top tax rate[3] that obtained from 1954 to 1963. This is by no means a “soak the rich” spiel.  I just simply don’t believe it’s unreasonable or unfair for people who own 89% of the nation’s assets to pay for 89% of the government’s expenses.

[1] Data source, except where otherwise noted: Federal Reserve Economic Data (FRED), Economic Research Division, Federal Reserve Bank of St. Louis:
[2] Domhoff, G. W. (2012, October). Wealth, Income and Power. Retrieved December 8, 2012 from Who Rules America?:
[3] Source: National Taxpayers’ Union. (n.d.). History of Federal Individual Income Top and Bottom Bracket Rates, ed.n. 5. Retrieved December 7, 2012 from National Taxpayers’ Union: