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.