The latest public discussions concern taxing the rich. The context is usually very narrow -- with a focus on inequality. The logic is simple. The rich, for whatever reason, have a lot more income and wealth than it takes to live. The poor don't have nearly enough. Any simple sense of fairness would argue for a redistribution. Taxing the rich, including corporations, seems to be the preferred vehicle to make things more fair in America.
Those who argue against this logic typically get caught in the bind of one dimension -- fairness. I remember professor Adler at Georgia Tech teaching us the the idea that every policy has both direct intuitive effects AND not so obvious ones. The discussion about higher taxes on the rich and corporations must therefore widen the argument. What could go wrong if we try to do what is right?
One thing that will clearly be affected by a policy to increase taxes on the rich is how those taxes affect national saving. National Saving? Really? It's true. This is critical. Why? Because national saving is what shows up in banks and other financial institutions and makes it possible for us to borrow. Imagine an extreme world where there were no savings sitting around in banks? When you went in for a car loan or a company went in to borrow money for a new plant, the banker would shrug and say sorry. We have no savings here and have nothing we can lend you for the plant that will employ workers or the store/plant that will sell/produce a car for you.
Why do I single out saving? Because here is a very clear case of rich versus poor. As you might imagine, the rich do most of the saving in the US. The richest Americans who are about 1% of the population account for at least 40% of all saving. Poor people account for almost zero of it. If we decide to tax the rich a lot more, then the rich will respond by spending and saving less. The drop in spending reduces demand in the economy. The drop in saving means less money in financial institutions and less borrowing for spending and projects.
This illustration with saving is meant to get at Prof. Adler's idea that you have to look at the obvious and the less obvious when analyzing any policy change.
A second point concerns the efficacy. If we tax the rich more, will that really reduce income and wealth inequality? Will that tax money really be used to significantly and permanently change the condition of those with lower incomes? We have had a progressive income tax and growing entitlement programs for decades, yet this has not dented poverty and has not resulted in more equal incomes. What do we do ten years from now after we have significantly raised taxes on the rich and income inequality remains skewed?
Does this mean there is nothing we can do? I don't think so. Maybe we are barking up the wrong tree? It might be easy for politicians to raise taxes on the rich. They can go home and sleep better. Maybe they simply are not up for the work of attacking what's really the problem?
What is the real problem. I have consulted with several small businesses who keep wages and benefits low. That is believed to turn the Net IBIT and the value of the company if sold or added a partner. It has nothing to do with efficiency in performance and if it did it would be negative due to employee's perception. Larger businesses do believe in efficiency and what it takes to go to a new market or grow sales. For the most part each are enabled by the tax laws to deduct certain expenses that tied to the marketing process and other requirements. The belief is even though some income is shielded the business will make more taxable none, hire more people or machines and pay more take in cash or contribution to employment programs. The system (to me) is working at a B level...but working.
ReplyDeleteRaising taxes and saving?
DeleteThe richest Americans who are about 1% of the population account for at least 40% of all saving. Poor people account for almost zero of it. If we decide to tax the rich a lot more, then the rich will respond by spending and saving less.
ReplyDeleteHard to grasp the logic of the 3rd sentence. If the rich really need to spend more, they can do it now and suffering a reduction from a 40% savings rate and construing it as a driver for increased spending on their part seems a mighty hefty stretch. This is a "sky is falling" argument.
Thanks Ed. The rich don't have a 40% saving rate. The 40% figure was how much of national saving is done by the richest 1%. They provide for a lot of national saving. My point that a tax increase aimed at the rich might affect their spending/saving behavior is born from theory and is therefore a theoretical conjecture. You might think that basic theory does not apply to rich people, but I wouldn't discount it. Another option is that they are motivated to use expensive tax lawyers and don't pay the extra tax anyway. In either case, the increase in already high tax rates aimed at the rich probably is not a great idea.
DeleteI guess my experience is that the "rich", which obviously includes more than the top 1%, might be defined as folks who are sufficiently comfortable that additional money does not impact their life style choices and for whom additional tax breaks really have only savings as a probable outlet. Certainly these saving became part of the investment pool and serve to drive lending and expansion. All well and good. And yes, the wealthy have more resources to ensure they optimize the tax system to their benefit and again that is what they should do. But at the end of the day, failing to address the growing wealth imbalance WITHIN CURRENT RESOURCES ( not just printing more money or wildly expanding social programs with no idea of who pays) seems to me to be simply shifting the ultimate costs. If people do not have the wherwithall ( which can be provided in a host of different formats) to raise themselves up, then the costs of that continual collapse will be born by those who do. So you pay now in an investment approach that you can control( infrastructure, affordable housing, education salaries, educational pathways, etc) or you pay later and lose control ( Drug issues, high incarceration rates, urban violence, increased corporate operating costs, etc.) I don't think there really is a free lunch option for anyone regardless of which end of the wealth spectrum they are on.
ReplyDeleteEd,
DeleteWe have wandered a bit away from the narrow idea of taxing the rich and national savings. But that's okay. I agree with you about the free lunch story. Sounds like physics to me -- for every action there is an equal and opposite reaction -- or something like that. Politicians want us to think they can solve our problems but it ends up being beyond their pay grades. Sometimes they do a little good but the general tendency is to promise too much and deliver much too little.