A Case for Higher Tax Rates on the Rich
By Steve Gillman - 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
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
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.
the Middle Class
Higher Tax Rates on the Rich