Tax the Rich

Last week there seemed to be a renewed effort by several people, including some very rich ones, to advance the idea that we need to increase taxes on the rich. Of particular interest is a wealth tax which would be added to the existing structure of income, property, inheritance, and other taxes.

The basic idea is that the rich are, well, rich. I recall the comic book character Stooge McDuck. He was very rich and he loved to enjoy many moments in his vault playing with his money. That image of the rich apparently has stuck with a lot of people these days and it makes it a lot easier to want to remove some of those coins from Scrooge's vault.

But I kid of course. One too many JDs this morning and all that.

But the truth is that the nation or at least some of us seem very interested in helping the rich part with their income and assets. The main idea seems to be that the rich won’t miss their money very much and there is a ton of good we can do with the resources. We can write off student loans, help the poor, save the planet, and much more.

So I wanted to think about all this a little more today. The first point an economist might make is to bring up the idea of the diminishing marginal utility of income. Let’s call this DMU since it is a huge mouthful to keep saying that over and over. DMU is a real thing and most freshmen at most universities are harangued about DMU by their wonderfully charming and entertaining graduate teaching assistants. It is a simple idea. If you are poor and I give you $10,000 dollars, you will be happier. If I give you $10k more on top of that, you will be happier but the increase in your happiness is not as big as the first tranche. By the time I have given you $1 million, the next $10k is hardly noticeable – the extra satisfaction you derive is negligible.

So it is true that by taking more taxes from the very rich, they might not notice it a lot. DMU explains why.

You cannot say that I didn’t start out on the left foot. But from here it gets more sketchy.

What happens when you take money from the rich?

The rich definitely give a lot of money to charity. What if the rich decide that they only want to spend a given amount for charitable private and national purposes and reduce their charitable giving by the extra amount of the taxes? Think of the United Way or your local Boys & Girls Club. What if we get free student loans but we have to reduce the activities of local charities?

What else does Scrooge do with all his coins? For one thing, we know that the rich don’t really bathe in vaults of money. They stay rich because they invest their money wisely – or at least try to do so. They often earn handsome rewards, but do the rest of us benefit from their investments?

I would think we do.

These investments can be directly spent on bricks and mortar – maybe a factory in your town.

These investments can show up in saving accounts in banks – and that money is loaned when you buy a car or a company borrows money to modernize operations, do research into new technology, or buy new equipment.

That money goes into bond markets meaning that companies and governments have a pool of funds for their needs, and this puts pressure on interest rates to stay low.

Much of the rich’s money goes into stock markets. Our pensions and other assets enjoy appreciation and growth when there is a strong demand for stocks.

There is the incentive issue too. We enjoy the fruits of entrepreneurship in small and large companies. We love it when companies solve problems, and we get better products and services. We love it when competitive companies innovate and reduce the prices we pay for all sorts of goods and services. Much of those activities come because capitalists love to improve things -- but it also comes because they love making money that they can use for all sorts of things. Paying taxes reduces how much they get to keep. Is there a point at which tax rates get so high that they would rather avoid all the pain of invention and sit all day at Peet's? Or go across the street and have a JD at TG?

You get the main point here. Whether it is local charities or various other uses of the money held by the rich, there are very widespread and measurable benefits to society.

I know the rich also use their money to buy yachts and caviar and spoil their rotten children. But another yacht creates employment and even a weekend in Vegas provides jobs for dealers, Uber drivers, and cleaning personnel. I don't believe for a minute that the rich do not enjoy incredible lifestyles -- but that is not the whole story. 

What’s left to say has to do with the idea that our government can use the money in even better ways than the rich. Sure we might have a little less of this or that when the rich change their priorities – but just imagine all the good that will come if incomes are more equal, we write off student loans, we give people better education, and so on.

Here is where we should all be from Missouri the Show Me State. We all learned about snake oil salesmen. We are taught that snake oil can sound really enticing. Is it not possible that those who speak the loudest about taxing the rich are people who will themselves gain power and riches in doing so? Why do we trust them so much when they have so much to gain?

Worse than that is just the reality of government in the face of immense and ongoing challenges. Do we really trust those clowns to do better than the last batch of clowns? Why now, with a little more money, will we solve problems of education, poverty, and environment? Will a little more money suddenly solve what decades of money has not been able to eliminate much less reduce? 

Do you really believe that adding even more money into poverty programs is going to miraculously successfully reduce inequality of income? Have we really figured out how to use public money to reduce the incidence of poverty when decades of poverty programs have done nothing but increase the rolls of poverty? Is it really fair to write off the loans of mostly people taking graduate work at private institutions when we didn’t do that for past generations of students? Will we be willing and able to provide such education for free for all future ones?

I’m not rich and I don’t care if we tax the rich. But if we do, I’d like to make sure that the net result is positive. The rich will reorient how they use their money. Are we sure those changes won’t make people worse off? Clearly the uses of the new monies could have wonderful results. But are these snake oil salespeople bent on convincing us that they have learned something new that will really reduce our nation’s problems? I haven't heard it yet. You? Show me how and why it will work this time.