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FRUM: Don't raise taxes for the rich
Commentator David Frum.
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Tess Vigeland: When members of Congress return from Thanksgiving recess, they'll have plenty of leftovers to gnaw on in terms of legislation with looming deadlines. The estate tax, unemployment benefits and, of course, the end-of-year expiration of Bush-era tax cuts. Much has been made of extending cuts for anyone under the $250,000 income threshold. But recently there's been some talk of raising that cap to $1 million.
Commentator David Frum doesn't think that's a solution either.
David Frum: America is not exactly in love with the super-rich these days. Super-rich no longer conjures up Steve Jobs bringing us the iPhone or Google putting all the world's knowledge at our fingertips.
The phrase instead conjures up investment bankers who wrecked the American housing market -- and then dumped the bill on the U.S. Treasury. So you can understand why the idea of a new higher income tax rate for people earning more than $1 million a year has gained political traction.
But it's still a terrible idea. Higher tax rates exact real economic costs: Maybe two dollars in dead weight loss to the economy for every extra one dollar collected. That's according to Martin Feldstein of Harvard and the National Bureau of Economic Research.
One reason that higher rates do so much harm: Very rich people have a lot of economic options. If income tax rates rise too high, they will invest time, energy and money to redesignate their income. If, for example, corporate tax rates are lower than personal, they'll hold income inside corporations. Or their accountants will invent ways to transform income into capital gains or to generate tax losses.
This tax avoidance by the rich is cumbersome and ineffective for the rich themselves. So if the tax rates are set at reasonable rates, tax compliance becomes the better deal. This was the thinking behind the tax reforms of the 1980s: At a maximum rate of 27 percent, it simply was not worthwhile to pay the lawyers to invent tax shelters.
There's a lesson here for today. The job of the tax system is to raise revenues for the state in ways that do minimum harm to the economy. The job is not to punish unpopular groups of people, especially when the punishment does much more harm to the overall society than to the intended targets.
Vigeland: David Frum is the editor of FrumForum and a former speechwriter for President George W. Bush. Commentator Robert Reich is back next Wednesday. Meantime, send us your comments.
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Frum's detractors in the comments here are more interested in a morality play than the economics of what actually happens. A tax increase on "the rich" (aka the top 2% of personal incomes) is a tax on JOB CREATORS. But the Obama Administration's commitment to class warfare says punish them anyway, i.e., REDISTRIBUTE their wealth to those who will eat it or blow it instead of creating jobs or engaging in other capital formation. (Have you noticed that those committed to wealth redistribution HATE capital formation? They oppose "trickle down" prosperity, but they seem to be all for "trickle up" poverty!) 70% of new jobs created come from the income and investments of that top 2% of the population, but the Administration and its cronies would rather punish them than create the jobs. The proof of this motive? The Administration has no accompanying proposals for tax credits (to effectively refund the money grabbed by the Obama-wanted tax rate increase) to those "millionaires and billionaires," because they take such satisfaction in making them thousand-aires. Increasing taxes on the highest personal incomes is a tax on job creation, pure and simple. That's why Frum is correct in asserting that "the job of the tax system is ...not to punish unpopular groups of people, especially when the punishment does much more harm to the overall society than to the intended targets." Whether you LIKE him or not, Frum's statement is TRUE.
Tax rate hikes for those who make over $250,000 a year may not increase revenue greatly, but it sure ain't gonna hurt the ol' revenue bucket balance. Where I live, other than medical specialists and local leaders, most gross $35K to $60K a year. I have serious doubts that a tax hike for someone taking home in excess of $250,000 is going to affect their ability to provide a fine quality of life, much less their ability to pay their utilities and secure food for the table. I am the first to admit that I don't have a full understanding of the impact of going to a flat rate tax, based on percentages. But I do think it is unfair to expect someone grossing $30,000 a year to have the same tax impact (even adjusted) as someone grossing $250,000.
Yes pity the wealthy for they suffer the slings and arrows of outrageous fortune. Or something like that...
Trickle down gets trotted out every few years to make the specious argument that the wealthy make this country what it is. Or that they pay some outrageous percentage of the income taxes. And given that those taxes are the bulk of what they pay in tax that is probably true, but...
In my lifetime i watched Reagan reduce the taxes on the rich and raise my Social Security Taxes to supply the poor elderly - which is presumably all of them since all received a raise - with a dignified existence. The revenue that didn't get siphoned off immediately went to fill the gap that was left after his tax cuts. Replay G W Bush.
The tax rate hedge fund managers pay is roughly the same that i pay in Social Security Taxes when you consider that employers portion comes from my productivity. Then as a great favor to me, the government allows me to give an additional 10% or more as my share of the Income Tax burden. Do the math and you get an effective rate of 24% of my gross income. Now tell me again how terrible it is to forfeit 15% for Capital Gains Tax, or that punitive 28% Income Tax rate for the beleaguered millionaires on their net income.
Can someone loan me a handkerchief to dry my eyes over the possible 4% injustice the wealthy misfortune at my hands...
Anyone who believes the tax cuts are sustainable should go into CSPAN's archive and find the hearings with the CBO (Congressional Budget Office) and the Republicans about the Bush Tax cuts. I remember the Republican's laughing at the CBO guys. The truth is that the tax cuts were ill conceived.
I agree that the tax cuts should be extended to the population that most needs them, but they should be stopped right now for the earnings above a certain level. Remember, income taxes ARE marginal, which means that the "rich" would still be getting the same tax cuts as the middle class. They just wouldn't be getting tax cuts for their earnings above a certain level.
I disagree with the assertion that higher marginal tax rates are always a "dead weight loss" on the economy. Those higher rates funded government research that led to the invention of the general purpose computer in the 1940s, the interstate highway system in the 50's, space travel in the 60's, and the internet in the 1970's. I find it ironic that Frum mentions Steve Jobs and Google when neither Apple nor Google would have existed without the taxpayer funded research that built the foundations for both computer and internet technologies.
Decades of lack of fiscal discipline on the part of Congress and the American consumer, aided by lax regulation, is the real issue. Yet Robert Frum attempts to repackage a failed idea known as trickle-down economics and sell it as a derivative that wears lipstick but stinks like the south end of a northbound horse.
Frum's tax policy logic is lacking. His subtle re-invigoration of the class-divide discussion revolving around a relatively inconsequential (as Frum himself explains) number like nominal income tax rate or bracket divisions, he offers no valid argument what the correct tax rate brackets are for peak economic value creation. Using his logic, one would infer that the national economy would improve if we reward the winners of the economic game with yet one more special tax break. Would the elites, lords of America, creators of all wealth, take pity on the unemployed peasants (taxpayers) with the sustainable well-paying jobs necessary to fund our nation's maintenance for long-term prosperity and health for all? Overwhelming evidence against trickle-down economics from the beginning of history definitively proves otherwise. Latest evidence: Ireland.
But wait! Frum unwittingly provides evidence to explain why the current income tax scheme could be argued to be fair only when the rates match actual wealth distribution, a highly progressive curve: the more one earns, the more tax avoidance schemes one has at his disposal thanks to political influence. Even if the rich earn their money in the USA, the present tax system, not being adequately progressive or watertight or cost-effective to enforce, supports their invariable preference to hide or export their wealth rather than to properly maintain the infrastructure they use here. Is that fair or good for the longterm prosperity of this nation, or merely one more well-connected voice that promotes the widening of the class division?
The entire history of trickle-down economics demonstrates how it incentivizes unsustainable boom-and-bust cycles, yet Frum shares his opinion that enshrinement of special favors for the rich will lead us all to prosperity. Super-rich Steve (annual salary: $1) and Sergei don't need tax breaks now — they needed incentives when they were working from their garages and dorm rooms. They are small entrepreneurs who did create wealth and still run their companies. Wall Street, on the other hand, makes money on transactions, win or lose. Goldman Sachs doesn't truly innovate or create wealth for the world — it conducts financial deals which, we now know, in the long term often causes more damage than good to everyone except Goldman employees. What's even more laughable than Frum's advertisement for a flat tax with no loophole reform is that these world-leading companies choose to locate themselves in the most progressively-taxed states of the nation. What do they know that Frum doesn't?
Skip the trickle-down salesmanship, Frum, and address real tax problems that lead to recurring underperformance of the American economy. Let's contemplate a proper overhaul of an overcomplicated tax system littered with special-interest loopholes that should never exist. Why incentivize only the rich, when history his shown that the poor and the middle classes also invest and innovate for the economic good of all? Would "punishment" — repayment of bailout funds by the economic deceivers who derailed the economy, but took ill-gotten financial bonuses nevertheless — not be justice? Tax proceeds plummeted in the 2008 mortgage crisis as the low- and middle-class overspenders, collectively unable to pay their own mortgages, nevertheless funded the bailout of the Wall Street overspenders. The Bush and Obama administrations directly subsidized the elite class while continuing to ignore the albatross of debt around all our necks. Yet Frum insists the bailout-enriched banking class deserves yet another special tax break which will only grow long-term debt? Heads the banker wins and tails the banker wins again while we pile up our childrens' debt?
We all agree that in the long run, it may be more fair if those ungrateful peasants, mere consumers and workers who are paid less than 1/500th of the average corporate executive despite the huge oversupply of qualified executives, should pay at least as much of a percentage of their incomes as the rich few who hold the vast majority of the accumulated and untaxed private wealth held in corporate safeboxes and offshore banks. But the pressing issue today is national fiscal sustainability. Regardless of the decades of political history and deficit spending that brought forth the national debt we have today, we need to pay it off aggressively to stave off further fall in the US dollar's prestige. Curtailing future federal spending alone in not enough to convince worldwide investors to continue to flock to the US. Investment is made by rich investors not when tax rates decline, but when new technology or market conditions promise a handsome ROI in a stable currency — and the USA will remain the best place on the planet to bring innovations to market only while the middle class buys those innovations here.
The "Bush tax cuts" did not stimulate the economy the first time around and do not merit the political argument Frum revives. There is a reason they were designed to retire: they are an unsustainable political trick. Much more substantial changes must be implemented immediately to end the USA's self-created economic malaise before tax rates are ratcheted down:
1) tax loopholes must be permanently closed, including sacred items like mortgage deductions, low investment income rates, and child credits
2) trade balance must be restored by every means necessary, even at the expense of many "free market" principles
3) aggressive spending reductions must be made, including sacred items like defense and healthcare
4) the federal budget must be balanced, preferably by constitutional amendment
5) long-term federal debt must be eliminated gradually by decisive and clear policy that incentivizes the economic potential of all citizens, not merely the top few percent
Only with aggressive fiscal discipline on the part of everyone, rich and poor, will the USA regain prosperity for all.
The Effect of Taxes on Efficiency and Growth
Martin Feldstein
This nontechnical paper discusses the adverse effects of high marginal tax rates on labor income and on investment income. It explains that the deadweight loss of a tax on labor income depends on the response of taxable income and not just the change in labor supply. An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and only collects about two-thirds of the revenue implied by a “static†calculation.
A tax on investment income brings a deadweight loss even if household saving does not respond to taxes and the net rate of return. What matters is the response of future consumption. The tax on investment income is also effectively a tax on labor supply because current work effort produces income that will be spent on future consumption and the tax on investment income reduces the future consumption that results from more work today.
I came online to listen to this story and read the transcript again just to make sure I got David's argument right.
I see nearly everybody has already pointed out the specious argument that lowering taxes for the rich will persuade them not to invent clever dodges, so I'll address the thing I found even more troubling in this piece, and that's his use of the word "punish."
If I read him right, David seems to think that asking the rich to pony up more to help fund our government is a punishment. What that might be a punishment FOR, exactly, is vague but it seems to imply it's a punishment for being, well, rich.
If that is true, and if that is a common belief among those endowed with seven, eight, or even nine-figure incomes, then they've obviously reached beyond the pale of being good, responsible American citizens into the realm of multinational oligarchs.
Actually, there's a good case to be made that most of the Wall Street crowd has already adopted this religion of entitlement which, if anything, argues well for yet another reason why they need to start paying their fair share.
The Bush era is over, boys.
That free ride is over.
Time to shut up, grow up and act like responsible adults.
The first time I heard this theory discussed was by George Will, thirty years ago. So as much as everyone wants it to be wrong because "It's Bushie's fault", I'm sorry. If we need money to pay people's unemployment benefits. I'll take whatever generates the most revenue. If you want to explain to them that you're going to let them starve while you figure out some way to Soak The Rich!, go ahead.
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