Bad Arguments Against Tax "Increases" by James Kwak

[Jefferson23]

Written by James Kwak
September 24, 2010 at 9:59 am



Last week, a professor making more than $250,000 per year (with his wife’s income) put up a blog post (since taken down) criticizing President Obama for wanting to “raise” his taxes.* The post basically said, after all of their basic expenses, “we are just getting by despite seeming to be rich.” If his taxes go up, he says he will have to cut back on spending, which will depress the economy, or perhaps even sell his house or cars, which will depress those asset markets. The problem, he argues, is that the tax “increases” won’t affect the true super-rich, because they use tax dodges to avoid paying taxes; instead, they will just hurt the economy.

This post has been the target of some howitzers on the Internet, mainly focused on the professor’s income and expenses, but I wanted to raise a few more general policy points.

First, it’s just not true that the rich will reduce their spending dollar-for-dollar as their taxes go up. The reason that tax cuts are a lousy form of stimulus applies in reverse: just as extra cash leads to more saving, less cash leads to less saving. And this is especially true for the rich, who have more slack in their budgets. There might be individual rich households that will reduce their spending dollar-for-dollar, but in aggregate it just won’t happen.

Second, there certainly are hard-working, young, dual-income, multiple-child, productive families who have high expenses. It is true that there is no single thing as “the rich.” Different people making $250,000 consume different amounts, and it’s not just a function of personal virtue; it’s also a function of where you live (some of those high salaries come in places with high costs of living) and where you are in your career lifecycle. But the obvious implication of that banal observation is that we should tax wealth, not income, or wealth in addition to income. If the people arguing against “raising” taxes on the rich were arguing for a wealth tax, or at least for a meaningful estate tax, then I would have more sympathy for them. (Or, say, a consumption tax with an exclusion for the first $40,000 of consumption.)**

Third, the “Cayman Islands” argument (that the really rich don’t pay taxes) is mainly false and, to the extent it is true, again yields a different policy conclusion. Warren Buffett, for example, pays an average tax rate of 18%, so the claim that “the super rich don’t pay taxes” is just not true. Now, that is a lower tax rate than many middle-class households, but the reasons for that are well known. Again, we tax income, not wealth; we tax capital gains and dividends at much lower rates than salary (again, thanks to George W. Bush), and the rich get a larger proportion of their income from investments; and the taxes that affect most working people are actually regressive, because of the cap on the payroll tax. So I would have more sympathy for the Cayman Islands argument if its author were also arguing for lifting the cap on the payroll tax and eliminating the tax breaks for capital gains and dividends.

remainder in full: http://baselinescenario.com/2010/09/24/bad-arguments-against-tax-increases/#more-8056

[Demeter]

1. Second that motion