A Case for Higher Tax Rates on the Rich

By - December 29, 2013

It has become difficult for people to progress from poverty and middle class to higher levels of income and wealth, and part of this is a function of tax policy. When a government spends a certain amount on its operations, and tax rates are dropped for the wealthy, someone has to make up the difference. Directly or indirectly that means the poor and middle class pay more. One "indirect" way is for government to borrow and inflate the currency. The resulting price inflation is then just a tax of sorts, paid mostly by the non-wealthy. The rich, after all, hold real assets that go up in price with inflation, while the poor, who have few assets, must spend all of their income for necessities that cost more. The middle class are somewhere in-between, of course, but they suffer more from inflation than the wealthy.

Currently, as a worker or small business person starts to make more money he or she faces higher and higher rates of taxation. This makes it difficult to progress financially. Only beyond a certain income level can a person begin to shift more and more excess income to investments, where gains are given special treatment in the tax code. At this point his tax rate is effectively lowered, and the tax savings are then invested along with the returns, so his assets grow even faster. Thus the rich get richer, if they can get to that crucial level of income to start with (and assuming they invest some of that income rather than spending it all).

When the wealthy keep more and more of their income thanks to reduced tax rates, they do not necessarily invest it in production of real goods. They often put it into speculative investments. It is moved around in the stock market, for example. This is why, after decades of falling tax rates, more and more people are employed not in the production of goods or services that add real buying power to the dollar (the more "things" there are for a given quantity of money, the more each dollar buys), but in creating systems, derivatives, and in marketing these non-productive "assets" to the wealthiest Americans.

Of course heavy taxation can dampen economic activity -- conservatives are right about that. The evidence can be seen where overly-high tax rates have been lowered. The usual result is that tax collections actually go up thanks to increased economic activity. But, contrary to the arguments of the conservatives, this doesn't suggest that taxing the rich more heavily hurts an economy. The crucial lesson is simply that taking too much out of the production of an economy hurts it. If we take the same amount but shift the burden from one set of taxpayers to another we will mostly see the ones who get relief doing better without damage to the economy

There are complicating factors. For example, the amount that a government can take from an economy before doing harm is not a static percentage, because how the money is used makes a difference. If infrastructure is built or upgraded, or education is paid for with tax dollars, these expenditures help an economy much more than a war, for example. The latter literally blows up a portion of economic production while also sucking young people out of productive endeavors to serve in the destruction of value (and life, but we're just talking about the economics here). If government expenditures tend to benefit an economy, then a slightly larger percentage of that economic production can reasonably be collected in the form of taxes before any real harm is done.

Also, it's worth pointing out that an economy probably does better when the burden of taxation is shifted to the wealthy. This is because the resulting increase in spendable income for the poor and middle classes does not often go into speculative investments. It is spent on purchases (and therefore production) of real goods, or invested in small businesses. As the economy benefits from this the wealthy owners of production will benefit. You can call that the "trickle-up theory," and there is more evidence for it than for the "trickle-down theory."

In the short term this benefit to the wealthy will not be nearly as evident as the benefit they get from simply keeping more of their money right now. Perhaps increased profits resulting from a more solid middle class will never equal the advantages the rich get from the way the game is rigged right now. But why is it that important that a man have, say, $45 million rather than $35 million? Given the historical evidence of wages and wealth dropping for workers as tax rates on the wealthy have been lowered, I vote for returning to a time when the wealthy were wealthy enough and paid higher tax rates. The key to doing this right is to shift the burden a bit but keep total tax collections down to a reasonable level, which is probably under 18% of total GDP.

One side effect of allowing the poor and middle class to keep more income and build more assets is a more stable society. When they are doing well themselves, fewer people will protest the "1%" who have the most. Also, crime loses some of its temptation when incomes are higher among the poorest, and when people have assets they might lose. And huge shifts in money that can cause various crises would probably be less common if wealth was more dispersed throughout the population.

Is it fair to tax the rich more heavily? If it is fair to tax anyone at all, the rates are largely just political negotiations, although hopefully informed by economic science. I've heard no argument that is logically sound for why 15% is an ethical rate while 25% or 35% is not. The rich get more value from government than the rest of us, since their homes, assets, and contracts that government protects are worth so much more than ours (really, would Bill Gates have even 1% of his wealth if no courts defended his patents and trademarks?). Hence they should pay more of the cost of government. How much more? Again, there is no easy and logical determination to be made, so let it be negotiated -- but hopefully with a wiser congress than we currently have.

Other Pages

Taxing the Middle Class

Widening Income Gap

Higher Tax Rates on the Rich