Wednesday, September 28, 2011

Class Warfare

Republicans huff and puff about Democrats’ assault on richer people. Democrats retort that they are not interested in class warfare – they just want to be fair. Finger pointing. Hateful words. My mother is bigger than your mother.

Is there a way to prove who is right or wrong about class warfare? I doubt it but we sure have fun slugging it out. As my Mom used to say, I don’t care who did it. You are both going to your room.

Instead of debating which came first the chicken or the egg let’s try another approach. Let’s just focus in on the question of taxing the rich more.  Taxing the rich is being discussed today as part of a program to reduce future debt and/or find a way to stimulate employment. Taxing the rich, according to some Democrats is a way to generate tax revenue so that future government deficits will be smaller. It seems fair to them since the rich, after all, are rich. Less of their income is devoted to buying goods and so there is less potential to harm spending in an already weak economy.  So the basic intuition of taxing the rich is that this is a way to reduce future deficits without overly slowing the recovery. In terms of fairness, it is believed that the rich have done well in the last 20 years and if anyone can take the load of higher taxes right now, it would/should be them.

Like any proposition, this one needs to be objectively evaluated. I don’t care if you are a Democrat or a Republican, you might not favor taxing the rich more if (1) it did not raise revenue, (2) it did not reduce future deficits, and/or (3) higher taxes for the rich had a negative implication for economic growth and employment
As is usual, I will not prove anything below, but I do hope to show that in 2011 there are many good reasons to believe that higher taxes on the rich will not be a good thing for the country. I’d rather take this approach than argue endlessly about whether or not this is class warfare. Let’s take one thing at a time.

First, what exactly do we mean when we say we are taxing the rich more? As I understand the current proposal it means reducing income tax deductions for persons having taxable income of $200,000+ and imposing a higher tax rate for people who earn a million dollars or more. So to begin with we could have a discussion about whether or not income tax returns of $200,000 imply that people are rich. While a Midwestern college professor living in small town who makes that amount might feel pretty wealthy I am told by people who live on the coasts of the USA that $200,000 per year does not indicate a lifestyle that involves high priced call girls and large shiny cars. And many entrepreneurs who file individual tax returns might quibble about whether such an income level would suggest even medium priced call girls or a Kia Soul.

This question of defining who is rich and who really has the capability to pay the tax and not reduce consumption has some relevance. This is not just a game of defining what rich means.  Is it possible that the current plan hits people who will make real spending cutbacks? Is it possible that entrepreneurs faced with such a tax will compensate by reducing wages or hours of employees? Thus, while it might be plausible to tax the rich for the purposes expressed above, it might be useful to do some serious homework about at what level you might be able to define rich and succeed. But even if this level can be found there is another issue that relates to how the rich will react when they are singled for punishment. Without significant changes in the overall tax code, is it not predictable that very rich people will feel singled out and work extra hard to find ways to exploit the existing code to reduce their tax liability?

Second, speaking of the rich and very rich, let’s talk about saving. Saving is boring. Except for a few exceptional people, most of us would rather have dinner with the in-laws than save. But consider the fact that saving greases the wheels of the economy. Thankfully in most countries there is plenty of saving going into the banks and other financial institutions each month so that entrepreneurs who want to invest have a source of funds. Consider, however the USA right now. The government is not saving. In fact the government is basically running down its saving to the tune of almost $1.5 trillion per year. That is, instead of that amount of money going to private borrowers it is being diverted to the government. The Fed has done its part to replace those savings but that is not a permanent solution. Every country needs for its businesses and households to save. And guess who does most or nearly all of the saving in the USA? That’s right – it is the richer people and the companies. If we aim a bigger tax bite at these richer folks and the small businesses who earn more than $200,000 per year, then this will mostly be seen by a reduction in US saving. Some might continue to save but they will use every loophole still available to park their money in places where they can get a decent after tax return. As a result we will see our preciously small savings going abroad and making our country even more financially dependent on China and other countries. You might call that a very significant unintended effect of taxing the rich more.

So the upshot is that while higher taxes on the rich looks like a nice way to improve the country’s debt problems, mostly what it will do is make them worse. As wealthier people save less or move their saving off shore, it just makes it harder for our banks and financial institutions to survive and make good loans for investments and houses. It also makes it harder for the country to grow. Remember that a country’s aggregate demand is composed of household spending AND spending by business firms for plant, equipment, office buildings, software, etc. Taxing the rich might seem to protect household consumption, but it does very little to similarly shield the rest of the spending. Higher taxes on the rich could very well mean more problems in banking and finance – and less spending and employment.

Let’s get back to the fairness issue. Measuring changes in fairness is to look at how the low, middle, and high income people have prospered over the last 10 years. It is absolutely true that of these groups, the wealthier ones have done the best. But does that mean that a policy to redirect money from the pockets of the wealthy to the pockets of others will improve things? I doubt it. Do we really think that the issues that plague the very poorest will be solved through another government poverty program? If you are concerned about wasting society’s money, do you really trust government to use these dollars to make a real dent in poverty? I doubt it. And the proof of this is the very fact that in the face of rising poverty we have not one single clearly espoused and forcefully lobbied analysis of poverty. Name one politician who is pushing a clear program to reduce poverty in the USA. You can’t because instead of one good program we have a mess of individual programs that are rife with inefficiency and corruption. That’s the way these politicians want it.  They make it look like they advocate for the poor every day and every way and the end result is all talk and no action. The rich are an easy target. But will taking from the richest really help the people who might benefit the most?  Give me a real poverty program to replace the current mess and I think the rich would be happy to vote for it and pay for it.

The same basic story relates to the middle class – a group that has suffered because of industrialization, globalization, reduced power of unions, bunions, and more. In the name of helping the middle class we have a myriad of conflicting and wasteful programs not to mention an almost constant outcry for business regulation and against any program that appears to assist business. We come back over and over and over to this silly notion that prosperous business comes out of the hide of the middle class. Some people honestly believe that for business succeed they must injure or take advantage of their workers.  It is so simple and wrong that most people forget the notion that it is a healthy business that hires more people. Imagine a time in the last 100 years when it wasn’t true that employment rose rapidly because businesses were thriving. How can one argue against creating a better climate for business flexibility, creativity, and competitiveness?

The present proposals to extract more income taxes from the rich won’t work and they won’t improve fairness. Class warfare or not, they simply miss the point. They won’t help the poor or the middleclass and will only be one more attempt to dupe the nation into supporting an inefficient government. If our policy makers really cared about the poor and the middle class then we should have seen a real program aimed at specific problems.

I have one last point. I took the high road here. But one has to wonder why it is that the President can believe that it is fair when half the country’s citizens don’t pay any income taxes. I suspect he would have a lot more luck in raising taxes from those who can afford to pay the extra taxes if he would just stop repeating his mantra about millionaires and billionaires and just get to the hard business of a comprehensive tax reform. It is silly to think that the country’s debt and other issues can be solved by taxing rich people more.  He could end up soaking the rich if he would just elucidate a program that examines the whole tax system and treats all people with dignity and respect. 


  1. Whew!!! That is a statement!.
    Middle Class: Vance Packard ( if you do not remember him you were not educated in the 60's) had 3/4 of his book devoted to the 3 levels of middle would think we were in a caste system. The US has always been known for upward and downward mobility and the freedom to move up or down as well as the opportunity.

    However, when the main concern of our policy makers is to get re-elected to their cushy jobs short sound bites sound good for their "people back home" and the party boss...not to mention their lobbyist's customers. None of this makes for good policy. They are masters of distraction. Fortunately for them, the average US citizen has minimal critical thinking skills and therefore relies on the media for their decisions. Are we stuck in this pattern? It certainly is a very poor business and governing model for the future.

    No! However, we must demand a tax over hall that raises good revenue without penalizing those who generate the jobs and the revenue. That does not mean we should open the gates to destroy the environment or neglect the safety of our means we need to not let our government get carried away in creating /saving jobs for themselves that are contrary to the success of this country.

    We also need to call BS when they come up with these silly programs that are short lived and give half of the funds to past supporters of that particular politician. Does Solyendra ring a bell? Does Health Care Plan to curb runaway cost ring a bell when cost have risen 9%+ over all in the last 12 months since the bill was passed.

    Maybe this is why nobody trusts the government..but we keep falling for the same old BS without questioning things and outcomes.

  2. One often overlooked benefit of a real comprehensive tax reform would be the redirection of resources (read lots of very smart well educated folks) from trying to figure out how to shelter, hide, defer, or redirect income into trying to solve real problems like world peace (sorry to sound like a beauty contest contestant).

  3. James,

    You would think that constantly banging one's head against a rock would start to hurt. But as Rage says -- we like to dream!

  4. I'm all for a comprehensive tax-structure overhaul. Let's start by demolishing the current one comprehensively and replacing it with a flat tax of say, I don't know, 18% to 20%. No withholding each month. At the end of the year, fill out a card and send a check. Actually, I like Herman Cain's 9-9-9 proposal. We might even consider adding a temporary 5% VAT to help pay down the debt. Only problem there is when was the last time any federal tax was temporary. Aren't we still paying that phone tax to fund the Spanish-American War? The legislation would have to set a definite time limit on it.

    I don't see closing loopholes and eliminating deductions as raising taxes. I suppose that it's a matter of semantics. I believe it's a smart thing to do, but the feds must be cautious as to which deductions to eliminate. Eliminating the mortgage interest deduction right now would just dig the hole a little deeper for that industry.

    Reagan's tax bill did away with many deductions, e.g, sales taxes, credit card interest, annual automobile mileage, etc. His big move was to lower the rates. Deny it all you want, but it helped start the longest and one of the largest economic expansions in our history.

    The libs, like Michael Moore, decry capitalism, but they don't have a problem using it to make themselves filthy rich. I'm not a Michael Bloomberg fan, but he did make a point that I agreed with when he said that Warren Buffet would pay higher income taxes than his secretary if he had any regular income. I'm not saying that we should raise the capital gains tax to punish Warren, but he should just keep his mouth shut and stop splitting hairs. Michael "Feed me" Moore, Warren "The Unlimited" Buffet, Barrack "Hoozurdaddy" Obama, and others who scream for the wealthy to "pay their fair share" are hypocrites of the first magnitude. The only way to get "the masses" to rise up is to harp on inequalities and the unfairness of it all. Progressivism at its best.

  5. Charles had trouble posting -- so I am doing it for him. Below's words are from Charles.

    Dear Mr. LSD. Yer latest post speaks to the heart of all men and women who want to be free – free in the spirit of the Constitution and Declaration of Independence – at least as I believe the Founders meant “free” to be free. Free to choose their occupation, to have a family, worship, benefit from the fruits of their labor, and to choose how they want to pursue happiness. At the time of the Founders there was no central govomit, rules, and regs to dick-tate how that was to occur – free enterprise/capitalism took its first breath while Socialism/Communism also were seeking first air. Fortunately, the latter proved flawed, for many reasons, one of which was the premise of divisiveness . . . specifically, economic “class” warfare.

    Obummer’s populist message to tax the rich rings rich among folks who have not benefited from the economic potential of this country and its free enterprise/capitalism/and grab the ring of opportunity opportunity – mainly, I believe, because the govomit (present and past administrations) has so much interfered with the workings of free enterprise/capitalism in commerce, education, finance, international trade, et al that those folks cannot break out/away from pursuing their happiness because of dependency on govomit. But, Obummer seeks to take govomit dependency to a much higher level via his “tax the rich” message which indirectly reinforces not only more govomit dependency but resurrects the economic class warfare upon which Socialism/Communism depend.

    His economic talking heads say that returning to the Bush tax cuts would halve the deficit in five years. Big deal; so what (and their assumptions are built on what house of cards . . .?). That says nothing about creating jobs – fawget Obummer’s Job Creation Program -- what a pile of shovel-ready stuff that Rush Limbaugh’s dawgs produce daily. Those who have a modicum of unnerstanding ‘bout econ and the tax code unnerstand that just leveling the tax code would do more to create jobs and taxation fairness and avoid the rich from moving their $$ to more favorable locales and/or seeking other tax shelters. Speaking of fairness, wouldn’t it be fair that the 51% of tax filers pay some income tax?

    Those who have some unnnerstanding of Obummer’s background (e.g. “international” family upbringing aka father avowed Marxist, his advocacy of social programs shown in his books, white antipathy, rev Wright, circle of socialist/criminal acquaintances like Bill Ayers, Carl Davidson, Van Jones, John Drew et al, and most significantly his community organizing . . . ) should be able to connect the dots betwixt his proclamation to radically change ‘merica and his “tax the rich” proposal. That proposal is his subtle, subliminal, populist approach to dividing this country so that it becomes more Socialist and commensurate with his grand vision for a more “fair” ‘merica.

    ‘splaining to us common folks the class warfare stuff in (macro) economic terms makes for interesting reading ( . . . cough, cough . . . which we all get . . . me thinks . . . . ). Some of us also unnerstand pretty well the tax code and fairness issues, but looking behind Obummer’s grand (philosophical) curtain makes more sense . . . at least to me. Obummer and his Ds don’t give a crap ‘bout fairness . . . . they never let a factoid get in the way . . . like 10% of tax filers pay 70% of income tax. He wants to radically transform ‘merica to be like Europe (now there’s a really good working model, eh . . . ?) and the latter just want to be re-elected on a populist “them ‘gainst us message.” Gotta elect Rs to let ‘mericans breath free air again and hold the Socialist wolf-in-sheep’s-clothing at bay.

  6. Thanks to Charles and Al for their posts. Among the things they wrote, they both seem to be greatly impacted by progressives and socialists. As an economist I share their concerns about bigger government and regulation and often I write about the negative or unintended consequences of government. Charles opines for the day when Republicans take over and improve things. My guess is that any major movements towards less government are not going to happen -- with or without a majority of Republicans. Once the genie is out of the bottle it is hard to stuff her back in. Populism has done nothing but grow and grow during out lifetimes. Strong leaders like Nixon and Reagan could not withstand the tide of constant demands for more government. Republicans might take a step or two but the people's backlash will then be swift and ugly. The Greeks are the most indebted place in the world and look at the outcry when the government tries to do anything to deal with it. While some folks hope and wish that a Republican majority will restore some sense of the past, I really doubt they will be able to make more than a dent in the progression of the progressives. The essence of government is favors. People will not give them up easily. The Republicans may have different constituents but the power of the purse weighs on them too. As I said the genie is out of the bottle. Wishing for a republican majority is fine -- but I doubt it is going to accomplish as much as some conservatives hope. What this means to me is two things. First, don't be too trusting of any party. We saw what Bush did to us in the way of spending. Second, focus on the most important changes you want and forget about a revolution. It just isn't going to happen! I am not suggesting that you vote for Democrats. I am just believing that even Republicans can only do so much in terms of what you ask.

  7. You're right....again. The only R who would be acceptable to the I's isn't really a conservative, and the R's need the I's to kick the D's out of office. But, at this point I'm thinking that Herbert Hoover wouldn't be nearly as bad as what we have in the People's House right now.

    Gotta run! I'm late for my personal trainer appointment. I'm woefully soft as the Great Leader has said. Too bad he's channeling Jimmy Carter. Jimmy's not even dead......or maybe he is and just doesn't realize it yet.