(Hemera)
People in the very upper tail of earnings distribution have seen their incomes rise far more rapidly than even the well-off folks in the top decile. That makes it hard to argue against President Obama’s proposed tax on millionaires, which just restores some progressivity to the tax structure. Nonetheless, we’ve seen arguments against it on grounds that it will reduce job creation (presumably because the rich have a higher marginal propensity to save than others). I’m always amazed at how concerned rich people and their apologists are about job creation (although their concerns are loudest at times when proposals are made to raise their taxes). It reminds me of arguments that got the short-lived tax on yachts in the 1990s repealed.
I don’t believe most macroeconomic arguments; but if one wants to argue on macro grounds, at a time of sluggish demand, if you want to balance budgets surely taxes should be raised on those with high propensities to save (arguably the well-to-do) and reduced on the rest of society, so as to stimulate consumer demand. You can’t have macro arguments both ways!
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Arguments are never about who is right, but rather who is loudest.
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How? Those with lots of disposable income save in bonds and stocks mainly while poorer people save in cash. If you tax cash holdings you hurt those with less money. If you tax the sale of stocks and bonds you reduce liquidity.
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Poorer people don’t save in cash; they don’t save (at least, not nearly to the extent the affluent do). Because they live closer to the margin, they tend to spend what comes their way, thus stimulating demand. Which is exactly what we need right now in this economy of depressed demand.
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The problem is that those same poorer people have significant debt right now, and are likely to use any marginal income to pay down said debt, rather than increase spending. Not that that’s a bad thing in and of itself, but it’s not going to increase aggregate demand. What a predicament! I would like to see just one politician (one who’s up for election) stand up and say, “Sorry folks, there’s not really anything we can do, it’s going to take years for everyone to deleverage, and then we’ll see some growth. We could try to make up for the money you the public aren’t spending through more government spending, or we could try to boost exports by devaluing the dollar and reducing your wages, but you all don’t seem to want that either. So… hunker down and maybe in five years we’ll be past this.”
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Same argument for credible inflation targeting: provide a stick incentive to put money to work because if you let it sit you lose value.
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It would be easier to buy into the rhetoric if more than lip service was put towards becoming more efficient with government spending. They’re burning through trillions at an unprecedented rate as our quality life decreases at a rate that mirrors their efforts. Perhaps it’s time we struck “hair of the dog” from the economic prescription pad, rather than holding out for divine intervention to justify our wastefulness. It’s bound to work eventually, but is it rational or responsible.
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Our negative savings rate is part of the problem. People buy more than they can afford – more house, more car, more gadget purchases on credit cards. That is what created this problem. So, do we really want to discourage saving? I truly think that idea is idiotic.
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Increasing taxation on high-value savers isn’t targeting the people “buying more than they can afford”. By definition, the people “buying more than they can afford” are *not* saving. The suggestion is not to tax the $50K a year income family who’s already stretched to the limit on their credit card payments, which is what it sounds like you’re arguing against. The idea is to provide a financial reason for individuals who are simply sitting on large amounts of liquid capital because of insufficient demand-if tax policy finally reflects how important it is to get this money into the economy (and I mean really in the economy, not bouncing around skeezy hedge funds) we might see the so-called “job creators” finally live up to their name.
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But unless I’ve misunderstood something, this would tax the people who save $10K of their $50K/year, but not the $1 million/year people who’re in hock to pay for the mansions, yachts, jets, and assorted bling.
I’m a lot closer to the $50K income class than the $1 million, but I still save quite a bit of my income. The main reason for this is that there is really nothing much that I want. So why should I be taxed to force me to join the squirrel cage economy, in which people work their butts off to buy consumer junk that often winds up just gathering dust in the garage? Isn’t that our basic problem, that so many got into their squirrel cages that it created a self-sustaining (for a while) boom economy that eventually collapsed?
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But unless I’ve misunderstood something, this proposal would tax people earning $50K/year who manage to save $10K of that, but not the $1 million/year guy who’s in hock and can barely keep up payments on the mansion & yacht.
Why should those of us who don’t want to climb aboard the squirrel cage economy be taxed for our preferred lifestyle?
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Funny how even economists argue that taxes should be raised on “those people, they’re more fortunate”. (Not smarter, harder working, etc. Just luckier.)
I find it hard to take these arguments seriously, because of the built-in biases involved.
“Don’t tax me, don’t tax thee, tax that feller behind that tree.”
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“…proposed tax on millionaires, which just restores some progressivity to the tax structure.”
You write this as though the tax code is not already progressive. It is well established that the top 1% of earners (Incomes>~$380K/yr) earn 20% of the total income but pay 38% of the total income taxes paid. This top group is already paying effectively a double share. Exactly what percentage would you consider adequately progressive?
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I never understand why Hamermesh feels the need to use the biased language he does.
Had he written “…proposed tax on millionaires, which just restores some progressivity to the tax structure” as “…proposed tax on millionaires, which increases progressivity of the tax structure” he would be stating fact, wouldn’t change the purpose of the post, but would remove obvious bias.
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I’d say “restores” is the proper word, as taxes (especially on the top incomes) have been steadily dropping since the ’40s. You wouldn’t know it from the National Review, RAND Corporation, or Heritage Foundation, but taxation’s at an all time low… remind me why we need to *cut* taxes again?
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Taxes have not been dropping. Tax rates have been dropping but the tax base is much broader (now that most sheltering schemes have been made illegal). Progressivity refers to the spread between the top bracket and the bottom one (and with so many tax payers effectively in a zero federal income tax bracket — you could argue that the tax system is as progressive as ever). Finally, capital gains tax, because basis isn’t increased for inflation, is more often than not really a tax on government caused inflation, not true gains, and so probably shouldn’t be included in any analysis of progressivity despite Buffet’s protests.
The only support I ever hear for this is a recitation of the marginal tax rates. But if you look at where the brackets changed and adjust them for inflation, you’ll see that the top rates only applied to incomes of $3.5 million/year (as an example, varying by year of course). This is far higher than $200k/yr., which is where the proposed rates will now begin to apply.
In reality, even few of “the rich” actually make >$1 million/year in ordinary income. That’s because the IRS caps deductions for salaries at $1 million. Most of the uber-high incomes are from stock/stock options, on which they generally pay 15%. But that is in addition to the 35% that the company is already paying. In other words, of their share of the company’s total income, they pay 50% to the government. This isn’t far below the very high rates in the early to mid 1900s, when many of the businesses were partnerships or sole proprietorships (and thus passed all business earnings to the owners). When these facts are taken into consideration, the story of low tax rates is much overblown.
Brian has it right. Taxes have been getting less and less progressive over the past several decades, so this would “restore” some of that progressivity that we have lost over those years.
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You are right in general but a key focus of the discussion should be on definitions. The new proposal from a tax perspective is much more palatable, and is a much more reasonable argument than the Republican idea that the poor should pay their share. However, the problem I have is with the total package. The bureaucracy is broken and the opposames on both sides are owned by the special interests. If he were to to drop the Construction Bank, tax credits for hiring, and school construction proposals, and add a repatriation proposal to the bill I think it would be extremely difficult to argue against. Even better would be to see him burn down the Department of Education. My biggest problem is both with the definitions being utilized and the ideals behind the legislation. Calling people that make a million a year as megarich is silly. It reminds me of books I read in junior high and high school about the negative stigmatism against the nouveau riche. We should be encouraging the idea and fostering it in the tax code that anyone in this country can start with nothing and either work hard or create a great idea, and become rich beyond their wildest dreams. The estate tax is a must old money (as you talk or I read your ideas as suggesting) needs to be put back into the economy. Also, I like the idea of Romney’s encouragement of savings and capital gains breaks for those with incomes less than $200k or so a year. That said, I would like to see a massive shrinkage of the US government. We need massive pension/social security reform in this country, and the healthcare system must be modified to prevent fraud/abuse of the system.
Hot debate. What do you think?
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