Why the Rich Should be Taxed More: Progressive Taxation, Spending Patterns and Unemployment

Source

Economic justification for progressive taxes

In addition to the moral argument for progressive taxation, there are some important economic and fiscal arguments in favor of it.

The top 10% of earners own 90% of all stocks and bonds

Source

The rich spend less and save more

Economists have observed that the rich spend a smaller total percentage of their income than the poor. This is why the vast majority of investments (which require saving) are owned by the very rich (see chart). The poor and middle class spend more, proportionally.

Therefore raising the income tax on high earners will not hurt total consumption as much as raising taxes on low earners. If we must choose someone to raise taxes on, this is one reason we should choose the rich.

US Unemployment and Taxes, 1948-2012

Source
These charts demonstrate that there is no positive correlation between income taxes on the rich and unemployment in the US. The rich are not the job creators often thought.
These charts demonstrate that there is no positive correlation between income taxes on the rich and unemployment in the US. The rich are not the job creators often thought. | Source

The rich do not create a lot of jobs

It is often argued by conservatives that the rich should not be taxed more because they are "job creators." The assumption made here is that wealthy people create jobs. They own large businesses, build factories, invest in new ventures and even hire maids and landscapers.

Certainly some jobs are created by the economic activities of the very rich. However, are they really "job creators"? Will the economy lose significant numbers of jobs if their spending power is reduced? The answer appears to be no.

Unemployment shows no relationship with the top marginal income tax rates in the United States over the last 60 years (see charts at right). In fact, today, with top rates at their lowest in many years, the unemployment rate is higher than it has been in a long time. If taxes on the rich really had such an impact on employment, we would not see these results.

Unemployment shows no positive relationship with the top tax rates across industrialized countries (see the chart I created below, using OECD data). The Netherlands, for example, had a top income tax rate of 49%, with 4% unemployment, whereas France had a lower tax rate (38%) and greater unemployment (9%). The data show no significant relationship between unemployment and taxes on the rich.

International Tax rates vs. Unemployment, 2010

Each dot represents a country. There is no positive correlation between top tax rates and unemployment globally.
Each dot represents a country. There is no positive correlation between top tax rates and unemployment globally. | Source

Taxes and job creation

It is common knowledge that the vast majority of jobs are actually created by small businesses, not big businesses. Interestingly, the very same politicians who claim that raising taxes on the rich "hurts the job creators" then turn around and declare that "small business is the backbone of the economy."

Small businesses, the primary job creators, are led mostly by middle class and upper middle class people, not the very wealthy. Most small businesses make $1 million or less in annual revenue, a far cry from the tens of billions that is the norm among the Fortune 500. If politicians are interested in subsidizing "job creators" they would do better to cut taxes on the millions of small business owners and entrepreneurs that each employ 5 to 10 people, rather than a few thousand wealthy families who collectively play a tiny role in job creation.

Furthermore, there are different kinds of rich people. Many high-earners are lawyers, doctors, or others who directly create few or no jobs. A regional manager with a very defined role in the corporate hierarchy is in a position to create many fewer jobs (if any) than a wealthy entrepreneur starting a new company. Among the top 1% of earners in the US in 2005, about 31% were executives, managers and supervisors; 14% were financial professionals; 16% were medical professionals; and 8% lawyers. Most individuals in these professions have limited "job creator" potential at best.

Finally, some rich people become rich by, at least in part, destroying jobs. Presidential candidate Mitt Romney is a prime example of this. In his capacity as a high-earning management consultant, he often cut costs and increased profitability for his client companies by shrinking their labor force.

So, rather than rich people being general "job creators" simply by virtue of being rich, some create jobs, some destroy jobs, and some have no effect.

Audi R8 Spyder
Audi R8 Spyder | Source

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Comments 60 comments

Sooner28 4 years ago

I found a study awhile back looking at GDP growth from 1979 to 1999 (approximately). It compared America to other countries and found no significant relationship between low taxes and high GDP. Unfortunately, it's somewhere in my favorites, and I have no idea where.

Most of what the GOP says is a complete farce. The good points they have about personal responsibility, individual initiative, and strong families often are not practiced by the very people (the rich) they support in the U.S. government. Inherited wealth, or just getting damn lucky (Henry Ford couldn't have made it without a national highway, and he was born in a country that had law and order) are sometimes the deciding factors.

The only possible argument that the right can make is one of liberty. Taxing people takes away their liberty because the government is choosing how people should spend their money; however, I had an interesting thought recently. For people like Bill Gates and Warren Buffet, who would have EXTREME difficulty spending all of their money if they tried, it would have a minute effect on their liberty. Great hub.


secularist10 profile image

secularist10 4 years ago from New York City Author

Thanks, Sooner.

I did address the softer, "moral" side of the issue in the previous hub in this series. And even on that point, there are important reasons why the rich should be taxed at a higher rate than poorer people.

You're right, there is no relationship between economic growth rates and tax rates on the rich. In the 1950s and 60s for instance, taxes were very high (80 to 90%), yet growth was in the double digits. More recently, tax rates are far lower (30 to 40%) while the growth rate is always 3 to 5% (in good years).


Sooner28 4 years ago

Money is power my brother. And power is what corporations want.


Express10 profile image

Express10 4 years ago from East Coast

There is a huge problem with taxes and the US is being bilked out of billions in taxes by fraudulent means and flat out avoidance of filing. Also, there are people stealing other people's identity and filing taxes to get whopping refunds in excess of five and six figures in some cases, the figures for Florida alone are greater than the GDP of some countries.

I also believe that it is not moral to penalize people who save more of their money and spend less overall, no matter how much or how little they are worth. Non-affluent people are already familiar with this as they are the most likely to get dinged with monthly and other fees for having any of their bank accounts below a certain balance. The spread of the idea of penalizing people who save or are smart with their money is nothing new but it never seems to get anyone further ahead.

Money is power. The IRS needs to step up it's efforts further and get in there and take what's legally theirs. And we need to have politicians that will be good stewards of the government's money. Good luck on that one.

Despite my differing views, I vote this up and useful. It's always good to hear another person's view and I did enjoy reading your hub. Thanks for sharing.


secularist10 profile image

secularist10 4 years ago from New York City Author

Thanks, Express 10.

I agree that fraud and those other issues are a big problem in the US tax system today. It's worth noting that tax evasion and loopholes that benefit the rich are much more significant drains on federal revenues than their equivalents among the middle class and poor.

But here I was focusing more on theory or a general justification for the idea of progressive taxation.

"The spread of the idea of penalizing people who save or are smart with their money is nothing new but it never seems to get anyone further ahead."

It's not about penalizing people for saving. It's simply that taxing a group who spends less rather than a group who spends more is better economic policy because it does not reduce overall consumption as much. Which in turn helps the economy, which in turn helps everyone, saver and non-saver alike.


MilesArmbruster profile image

MilesArmbruster 4 years ago from Somewhere on the journey

Good Hub, It seems to me that if the really wealthy people gave a rip, they would use their immense wealth to just go out and make some jobs. That would put an end to the argument of whether they use their wealth to create jobs or not. It seems that they just don't care what the answer is.


secularist10 profile image

secularist10 4 years ago from New York City Author

Thanks, glad you liked it.

It's not so much the wealthy per se that make the argument that they create jobs. It's the conservatives and similar people who make that argument for ideological reasons.


Jane Bovary profile image

Jane Bovary 4 years ago from The Fatal Shore

Hi secularist,

As usual, your arguments make perfect sense. Money in the economy doesn't so much *trickle down* (so sick of that one) as bubble around. The more money in the middle and working classes, the more percolated the economy.


secularist10 profile image

secularist10 4 years ago from New York City Author

That's a good analogy, Jane. Money also "pools" in the sense that money attracts more money, and it gradually collects in certain hubs. Since it takes money to make money, this makes sense.

Money might trickle down in a developing country where a single rich man or large multinational can employ half the population all at once. But in a country that is already rich, the circumstances are very different. The middle class becomes an essential component of prosperity, far more important than the upper classes. Left to its own devices, a free market will create a tiny class of winners upon a mountain of losers. So government does have a role to play.


nicomp profile image

nicomp 4 years ago from Ohio, USA

The rich may not create jobs, but confiscating more of their income won't help our spending problem. If we tax the top 1% at a 100% rate we could prop up the deficit for less than a year.

According to money.cnn.com, the top 1% of earners had an average adjusted gross annual income of $343,927 in 2011.

1.4 million earners meet that requirement.

Collectively, the top 1% earned an AGI (Adjusted Gross Income) of $1.3 trillion, in 2011.

The federal govt is adding to the federal deficit by $4 billion a day. Every day.

If they confiscated all the income of the top 1%, they could eliminate the deficit for 325 days. Not even a year.

That’s a 100% income tax. Is that fair enough?

http://money.cnn.com/2011/10/20/news/economy/occup...


secularist10 profile image

secularist10 4 years ago from New York City Author

Nicomp:

Well, you have missed the mark. This article is not about the current fiscal issues in the US, it is a theoretical discussion and legitimization of progressive taxation.

The real important thing everyone has to remember is not that "raising taxes to confiscatory levels on the rich will solve the deficit problem"--it won't. The math is very clear on that.

The real important point is that raising taxes on the middle and lower classes--and even on much of the upper classes and "merely" rich--is totally counterproductive and useless. Much of conservative ideology claims that "everyone should have skin in the game."

Such an attitude neglects the fact that the rich pay the vast majority of taxes because they, quite simply, have the vast majority of the income.

Regarding, the current mess in the US, I will say two things. First, the US tax system is not totally progressive. At the highest end, it actually becomes regressive. Through lower capital gains taxes and various other regulations and rules favorable to the very rich, average tax rates actually decrease. There are even some among the 400 richest households who pay zero tax.

Second, the proper approach to the current mess is to raise taxes on the richest Americans and cut spending. Period. There is no other way to balance a budget than to raise revenue or to cut spending, or both. The US needs both.

Raising taxes on the middle and lower classes will accomplish nothing, because they have so little total money, and it will significantly curtail aggregate consumer spending, which comprises 70% of the economy.

It makes no sense to have a tax system where a person making $300,000 pays the same tax rate as a person making $3 million, who pays the same tax rate as one earning $300 million. Vastly different orders of magnitude, but the same tax rate. That is the current US tax system.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Perfect Hub, Secularist, just perfect. Rated it awesome. One thought though you might check out to see if I read my numbers correctly. I also was under the assumption that the "small" businesses created the most jobs; it turns out, if I understood "Table 2a. Employment Size of Employer and Nonemployer Firms, 2008" correctly (it acctually supports the idea in an unexpected way and shoots it down as well).

-- as of 2008, six million firms employ 121 million people

-- assuming small business is classified as those businesses employing fewer than 500 people, a common SBA criteria, then you just accounted for 60 million employees

-- of the large businesses, those 1,956 who employ more than 5000 people at each firm, well they account for 40 million people of the remaining 61 million

-- so small business at best accounts for 1/2 of total employment

*** -- but here is the kicker and pushes it back into your court, beyond the 6 million firms who employ people, there are another 21 million (!) fims who employ no one, but have gross receipts of $1 trillion. Since those may be professional groups, etc, the number of members per firm is greater than one, so this demographic actually accounts for more than 21 million people.

When you lumb non-employer firms in the total, then the "common" knowledge theory holds, take them out, it seems that it doesn't. Either way, it doesn't pole a single hole in what you asserted.


nicomp profile image

nicomp 4 years ago from Ohio, USA

"It makes no sense to have a tax system where a person making $300,000 pays the same tax rate as a person making $3 million, who pays the same tax rate as one earning $300 million. Vastly different orders of magnitude, but the same tax rate. That is the current US tax system."

Is makes perfect sense. This 'hate the rich' mantra is tiresome.


secularist10 profile image

secularist10 4 years ago from New York City Author

My:

Thanks a lot, I appreciate it.

So if I read this correctly--there's a total of 121 million people employed by all firms

60 million are in firms with fewer than 500 workers

40 million are in firms with more than 500 workers (I think you made a typo there)

21 million are in "non-employer" firms

Now, the majority of non-employer firms are self-employed people, according to the Census definition (http://www.census.gov/epcd/nonemployer/view/define... )

These would include freelancers, independent contractors, etc. So these would certainly count as firms (or at least they should) in the total. This is the segment of the population where entrepreneurship and innovation really originates, so it behooves government to encourage these kinds of people. But they don't. They prefer to give large subsidies and tax breaks to large multinational corporations.

But as you say, any way you slice it, small businesses are certainly the majority of employment.


secularist10 profile image

secularist10 4 years ago from New York City Author

Nicomp:

It makes perfect sense? How? You make a declarative statement, but do not offer any argument to defend it.

Logically, if the tax rate increases from $50k to $100k, why should it not increase from $300k to $350k, for instance? Or certainly to $3 million, for that matter? Why should the tax rates stop their increase arbitrarily at $250k, when most of the income is above that level?

And you cannot point to a single thing I've said that falls in the "hate the rich" category. I've only sought to dispel myths and look at the cold hard facts. I have nothing against rich people at all. I have great admiration and respect for anybody who works hard, innovates and builds a successful business. I work with businesspeople. I am a small businessperson myself!

So for you to lump me together with some wild-eyed socialist is unfair and irrational.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Secularist, nope, there are a total of 27 million fims out there; 6 million employ 121 million people; an additional 21 million firms only pay the themselves or the partners, but nevertheless "employ" nobody. So, my 60 for less than 500 and 61 for more than 500 add up to the 121 for those firms who have an actual payroll. So, in total you have 142+ million (because you don't know how many owner-only partnerships e,g,, husband/wife truck driving company, there are) people doing work of some sort.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

To another part of the question, how do you slice up "small business" regarding tax policy and incentives? Let's assume for grins and giggles that 75% of "non-employment firms) are single owner and the rest are two-owner companies; that makes our working population 150 million and

-- this class 19% of that total

-- 5000 and over make up another 27%

-- 500 - 5000, about 14%

-- 100 - 500, about 12%

-- 20 - 100, where my company is, about 14%

-- 1 - 20, about 14%

I would argue each segment has its own special needs. Take the bottom 14%, I would suggest that as a rule, market entry and start-up at that level is not too difficult and needs only modest help; staying in business and keeping those people employed is another story entirely.

Whereas the opposite is true if you are starting at the top, market entry at that level is extremely difficult, but once there, is somewhat self-sustaining. Normally, I think, firms who get to this point grew or merged from smaller entities.

For those who do not employ people other than themselves, market entry is probably all over the map as is survival rate; buying a big rig is not cheap for a single person by any means.

I would argue incentives need to be tailored to the situation.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Nicomp, why do you keep insisting that those who support upping the top bracket back up to the Clinton era rate are looking to solve the deficit problem "only" by this methodology when you know that is not the truth of the matter? That is what your "... If we tax the top 1% at a 100% rate we could prop up the deficit for less than a year.." statement implies to me, anyway. Any rational person knows you can't solve the deficit problem by tax hikes alone just as the same rational person knows you can't solve it by "spending cuts" alone and still have a viable government and society.


nicomp profile image

nicomp 4 years ago from Ohio, USA

Your only argument is to tax the rich "because they have the money." That's it. Clinging to a tax rate from a previous administration makes no logical sense whatsoever. Are you in favor of imposing the budget from that administration as well?

You're inciting class warfare and pandering to the lowest common denominator. Your photos are denigrating, obviously intended to imply sloth and excess on behalf of the rich. My take is that you don't like rich people for some unknown reason. It's your sandbox and you can play any away you like, but at least be honest about it.

Regarding spending cuts commitment with your tax hikes: if you do the math, as I have, you'll realize that your tax hike is a trivial pittance compared to the deficit. It would have absolutely no fiscal effect whatsoever. It would, however, placate the uninformed masses. I suspect you already know that.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

I will address the latter half, Nicomp. I have done the math as well, for as you know, that is what I use to do, and the Obama plan put forward last year had roughly 50% of the deficit reductions coming from changes in tax policies to generate revenues, about $1.5 trillion worth, the other $1.5 trillion came from spending cuts. While it may be in yours, $1.5 trillion over 10 years is not "a trivial pittance".

Further, as I have shown clearly in a couple of different hubs, it is impossible to reduce the deficit by spending cuts alone without breaking America.


nicomp profile image

nicomp 4 years ago from Ohio, USA

Just to be clear, the first Obama campaign promised to cut the deficit by 1/2 in 4 years. As you surely know, that hasn't happened. He, and Congress, have added 6.2 trillion, as you surely know. To suggest that a second term will be any different is specious at best. Economic cycles do not follow 4 year intervals: there is no reason for Obama to suddenly start cutting programs in his second term when all he did was expand them in his first term.

The Senate Budget Committee had studied Obama's 'plan' and decided that the deficit will continue to grow over his second term. I think you may be confusing reductions in spending rates with actual spending cuts: federal accounting procedures don't dovetail with the real world.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Yep, Obama clearly missed the mark on that one for sure, but then he ddn't know how much damage the Conservatives had done to the economy. Very few economists, and none on the conservative side, were predicting the devastation that became evident in January 2009. I suspect at that time Obama knew is campaign promise was dust. If he didn't, he had to know once the Conservatives mounted their counteroffensive to stop his program in its tracks; doing everything in their political power to make him fail, just as they promised.

Of course, the Democrats and Obama didn't help themselves either by futzing around with Obamacare, but hey, they are Democrats and have never marched to a single drummer like conservatives do today.

Senate Budget Committee AND the CBO, both agreed on that, but, they both said the deficit would start coming down around the 8 - 10 year mark, if memory serves. And I do understand the differnce, I spent a career in the Air Force Comproller's office having headaches over it.


nicomp profile image

nicomp 4 years ago from Ohio, USA

"Yep, Obama clearly missed the mark on that one for sure, but then he ddn't know how much damage the Conservatives had done to the economy. "

Puhlease! He was a sitting US Senator! He's a graduate of Harvard Law, ostensibly!

Incredulity aside, what damage did the conservatives do to the economy?


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

But, what he is not is a soothsayer, he isn't prescient, he can't see into the future. Instead, he does what most of us do, rely on the experts, economists in this case, and they had it wrong, espectially the conservative economist who helped get us into mess in the first place with their wrong-headed economic system.

Are you telling me that President Bush actually knew Hussein didn't have weapons of mass destruction and yet sacraficed tens of thousands of American lives simply because he wanted to kick the Iraqi's butt?

Damage? You have heard of the Great 2008 Recession haven't you?


secularist10 profile image

secularist10 4 years ago from New York City Author

My:

Ok, so 21 million people are employed by non-employer firms (i.e. self-employed, freelancers, etc).

60 million people are employed by firms with less than 500 employees.

61 million people are employed by firms with more than 500 employees.

So if we add the 21 million plus the 60 million, we have a total of 81 million out of all 142 million workers, which is about 57%. Not a huge percentage, but still the majority of all employment. There is also much more dynamism at that lower end of the scale.

Of course, another source of uncertainty is that the non-employer firms are often not the sole source of income for that owner. For instance, someone works for a small business and also does work as a self-employed person on the side.


secularist10 profile image

secularist10 4 years ago from New York City Author

Nicomp:

I assume this was addressed to me:

"Your only argument is to tax the rich "because they have the money." That's it."

Certainly not. I made several specific arguments in the article justifying progressive taxation. Whether that is a tax system from 1% to 10%, or 20% to 50%, depends on a particular country and their legislature. The point is that progressive income taxation works and is legitimate.

I said that the rich spend less and save more--that was one reason justifying progressive taxation. It is a fact.

I also said that the rich are not responsible for significant amounts of job creation, and I provided data from the US and from other industrialized countries to prove it.

"You're inciting class warfare and pandering to the lowest common denominator. Your photos are denigrating, obviously intended to imply sloth and excess on behalf of the rich. My take is that you don't like rich people for some unknown reason. It's your sandbox and you can play any away you like, but at least be honest about it."

The pictures are just for fun to break up an otherwise dry text. You are reading too much into things and jumping to conclusions. I reiterate I have nothing against rich people at all. This is about intelligent fiscal and economic policy.

If you think you can psychoanalyze someone who lives in another part of the country who you have never met, that says a lot.


chip1775 profile image

chip1775 4 years ago from Atlanta

The only problem I see with your argument is the fact that a high tax rate does not produce more income at all. In fact, Kennedy slashed the tax rate during his presidency and taxes collected went up, not down. A progressive tax structure is merely a means for the government to control personal behavior, it does not add revenue.


nicomp profile image

nicomp 4 years ago from Ohio, USA

chip1775 , spot on. Taxing something causes less of it to be produced.


secularist10 profile image

secularist10 4 years ago from New York City Author

Chip:

That depends. Sometimes revenue increases, sometimes it decreases. We can look at countries outside the US to see this pattern as well. There must be some middle point in tax rates where government maximizes revenue, since a 0.02% tax rate will surely not yield more revenue than, say, a 20% tax rate. And progressive tax systems in general always produce more revenue than flat tax systems.

In any case, I did not say that revenue will always increase with higher taxes. I don't believe that.

A progressive tax structure is not a means for government to control personal behavior. The reasons why it should be used are outlined in the article. For instance, the issue of consumer spending--the rich spend less, proportionally, and the poor spend more. So that is one reason why, if government needs to raise taxes, it should opt for the rich, not the poor.

Nicomp:

Sometimes that's true, sometimes not. The world is complex. Economies are complex.


chip1775 profile image

chip1775 4 years ago from Atlanta

http://www.heritage.org/research/reports/2004/06/t...

This is an article by Arthur Laffer that shows actual data that supports my argument. I would recommend that you and the other readers of this article read it. As far as controlling behavior, government uses tax breaks and federal grants to control behavior. I don't see how else you explain it. A progressive tax structure is, simply put, power in the hands of the government. That is why a flat tax is largely ignored by both parties despite the over complexity of our current tax system.


nicomp profile image

nicomp 4 years ago from Ohio, USA

"Economies are complex.", but every presidential administration is happy to tinker with them. And voters buy into it.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Chip, I studied up on Laffer over the last several months and found it very interesting. Unfortunately for conservatives, it is woarking against them now. I think conservatives forget that it is a curve, not a line. As a curve, that means it has a maximum point where if taxes are lowered past that point, that is a bad thing. Studies show we have long past that point with the Reagan tax cuts; in fact, he went too far, based on the Laffer curve and historic results. Inflation adjusted federal tax revenes fell with his tax cuts, they also fell with President G. W. Bush tax cuts as well. They did increase with President Kennedy's tax cuts, however.


chip1775 profile image

chip1775 4 years ago from Atlanta

Read the article I attached in my last comment esoteric.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

I did, I had before as well. It is dated 2004, however. More recent studies have put the Laffer "sweet spot" for the tax rate between the rather large range of 35 and 70%. Consequently, the current rate is already at the lower end of the range of these estimates.


chip1775 profile image

chip1775 4 years ago from Atlanta

Can you link recent studies so I can look?


secularist10 profile image

secularist10 4 years ago from New York City Author

Chip:

Indeed, we are all familiar with the Laffer Curve. It's a theoretical construct, nothing more, nothing less. Laffer himself says:

"The Laffer Curve itself does not say whether a tax cut will raise or lower revenues."

The theory on its own does not say whether, in a given time and place, a given reduction from, say, 30% to 20% will increase or decrease government revenues, versus an increase from 30% to 40%. There are many other factors involved, which Laffer, though brilliant, fails to take adequate account of.

The article makes some interesting and important points. Certainly, there are many situations where tax cuts are beneficial. But not all the time. For conservatives to assume that tax cuts are always and everywhere called for, is simply ideology, not rational analysis.

I also note that Laffer chooses to focus on periods of tax cuts, without taking into account the periods of tax increases that coincided with economic expansion (in the 1990s and during WWII specifically).

Sometimes we should raise taxes, sometimes we should lower them. In any case, this is a separate topic from the legitimacy of a progressive tax system, which is what this article is about.

"As far as controlling behavior, government uses tax breaks and federal grants to control behavior."

That has nothing to do with a progressive tax system. A progressive tax system is simply one where tax rates increase with income. That's it. It has nothing to do with subsidies, grants, loans, loopholes, or anything else.

"A progressive tax structure is, simply put, power in the hands of the government."

Well, you could say that about any tax. Indeed, you could say that about a flat tax. Or a regressive tax. All taxes constitute "power in the hands of the government" on some level.

If that is your real beef, then we can talk about government and the role it should play in society.

But that's not progressive taxation.


secularist10 profile image

secularist10 4 years ago from New York City Author

Chip:

One more thing on cutting taxes. It's all well and good to cut taxes by 20 percentage points from 90 to 70. But eventually it becomes like the interest rate set by the Federal Reserve: the lower it goes, the less power it has to affect the economy.

A 20% reduction, when taxes are at 90%, brings it to 72%. That is a drop of 18 percentage points.

But a 20% reduction, when the rate is at say 30%, brings it only to 24%. That is a drop of only 6 percentage points.

So for conservatives to simply call for "tax cuts everywhere at all times, period, and the economy will pull off a miracle," clearly reflects little or no actual analysis. A drop of six percentage points will have much less stimulative effect, other things equal, than a drop of eighteen percentage points.

That's a major reason why it's more complicated than the conservatives would like it to be.


secularist10 profile image

secularist10 4 years ago from New York City Author

Nicomp:

""Economies are complex.", but every presidential administration is happy to tinker with them. And voters buy into it."

That's true. That applies to both parties. Real reform is what is needed. But policy does make a difference.

My Esoteric:

You're right, it is a big range. And that's because it is a theory, not a specific policy recommendation. Which most don't quite get. And Laffer himself does not do an adequate job of making that clear.

There was an article published this year in the Wall Street Journal by two professors on the income tax sweet spot. They decided that tax rates could go much higher--even above 50%--without a negative impact.


chip1775 profile image

chip1775 4 years ago from Atlanta

Honestly I'm shocked that anyone would think it acceptable to take half of what a person earns. I'm sure we will see in the coming years what a higher tax rate will do for revenues. Maybe you can explain that away too. A progressive tax controls behavior because the government says how much we can keep based on how successful we are. A flat tax does not. You made the argument yourself that a progressive tax structure helps class mobility. I don't think any conservative is arguing for tax cuts right now, they pretty much know that is impossible in this administration. I think the big argument is whether to raise taxes is good policy in an already fragile economy. "Letting the tax cuts expire" is code for raising taxes by the way. Perhaps raising taxes can help this economy, but I just don't see it. The logic is a little fuzzy to me. I don't think raising taxes will increase revenue at all, maybe in the short term, but only a drop in the bucket compared to what is needed.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

http://en.wikipedia.org/wiki/Laffer_curve#cite_not... is the most general article and it gives more specific references to the sources used. The studies referred to range from 1991 to 2009. Included is a summary of the CBOs analysis of the Bush tax cut.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

What seems to me that most people forget, probably liberals as well, is that taxes is the "taking of your of money never to be seen again" from anybody. At worst, it is the "unwilling giving of your giving to used for purposes not of your choosing". But, at the end of the day, a taxpayer gets back every penny of their taxes in terms of some direct or indirect service they may or may not have wanted.

Bottom line is that their taxes have purchased a service of one sort or another. What services have that willingly or unwilling purchased?

- Defense of their nation

- Insurance to provide them a survival pension in their old age

- Insurance to provide them health care in their old age

- Insurance to provide them or their children health care when in time of need and they can't afford it

- Insurance to provide food and shelter for themselves and their children in time of need

- Enforcement against the ravages to the environment of big business

- Enforcement against crime that crosses state jurisdictions

- Enforcement of a safe transportation system

- etc, etc, etc.

But, all I hear is "does anyone think it is acceptable to take half of what anyone earns .." (the implication of which is wrong on the face of it, they don't. They take 1/2 of what somebody earns over a certain very high threshold. Even billionairs today conservatives are so conserned about having to pay a whopping 35% actually only pay between 0% and 19% in effect taxes -- boo hoo -- mine was 25%.)


nicomp profile image

nicomp 4 years ago from Ohio, USA

"But, at the end of the day, a taxpayer gets back every penny of their taxes in terms of some direct or indirect service they may or may not have wanted."

You have got to be kidding. By your logic, the buildings full of bureaucrats are all working for free.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Raising taxes in the way Democrats want to raise taxes, meaning letting the tax cuts on the wealthy expire, absolutely would increase revenue, roughly $1.4 trillion over 10 years is the CBO projection, I believe. Nor would such an increase impact jobs one iota for while it is a 5% increase in the marginal rate, it might, emphasize might, mean a 1% increase in the wealthy's effect tax rate; I suspect it will be less than 1%, may 0.1%. Keep in mind for, for a billionaire to pay another $1oo,ooo in taxes is like playing another round of 1o bets at the blackjack table and losing each one. (Yes, people do that, I was at Wynn casino once watching a guy bets with $5,000 chips one night, I was in the aisle passing by looking around in awe, btw, of course he was winning, sighhh; I stopped playing blackjack about 5 years ago, I couldn't win to save my life anytime I sat down at a table, it was no longer fun. Same with slots recently, I am now limited to Pai-Gow, bummer.)

Is $1.4 trillion all that is needed? As you suggest, Chip, no. another $3 trillion still needs to come from spending cuts, to which Democrats agree. But, even that isn't enough. The only real road to recovery is an improving economy and so long as the conservatives soul goal was to destroy the Obama presidency, the economy was guaranteed not to improve very much. With business seeing how disfunctional government was because of the results of that resolve, they did what businesses do, they waited to see who would win. Well, on Nov 6, they got their answer, no one did.

So, unless one side or the other changes their tune, which isn't likely to happen, the conservatives will continue to try to destroy Obama; Obama who has a somewhat stronger hand will successfully resist; the economy will continue to stagnate or maybe fall into recession because conservatives will not give up on protecting the wealthy even though only 20% of the country agree with them.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Nicomp, only in the sense that the employees in the local McDonalds store work for free.


secularist10 profile image

secularist10 4 years ago from New York City Author

Chip:

Mitt Romney and the Republican party were calling for income tax cuts during the election.

I'm not sure what you think I have "explained away." I've provided lots of data and analysis here.

"A progressive tax controls behavior because the government says how much we can keep based on how successful we are. A flat tax does not. You made the argument yourself that a progressive tax structure helps class mobility."

A flat tax, as I said, constitutes a behavior control because it determines people's income. This is a distinction without a difference. If behavior control is your issue, then all taxes are your enemy, because they all control behavior in some way, shape or form. Progressive taxation has certain behavior effects (such as class mobility), flat taxation has others.

Raising taxes will only help this economy if the money raised is put to good use. Is that likely to happen? I don't know. Obama and the Democratic politicians have a very poor track record.

But in general, conservatives tend to see all money sent to the government as money sent into a black hole, never to be seen again. (It wasn't always like that, of course: conservatives in the past took much more ownership over government and realized that it could be put to good use.)

But clearly that is nonsense. Tax monies are used to pay for lots of things that conservatives and liberals want: safe food, keeping the streetlights on, making sure grandma doesn't die in poverty, and so on.

You can't just look at the costs, you also have to look at the benefits. If both Republicans and Democrats can work together to spend the money on the right things, then the economy will improve. But that will be hard as long as one side sees the spending as always inherently a bad thing.


Keith Sutherland1 profile image

Keith Sutherland1 4 years ago from Rural Tennessee

I think this was a good hub and I like many of the comments. There was one that doesn't care for or believe in trickle down. A very large portion of my income comes from working for rich people. Though I don't agree with everything posted here, I also know that averages are mainly middle ground. I personally would prefer that the rich don't get hit too hard with a tax increase because, in my experience, when they feel they are going to be taxed too much, they call me less. The rich, like most people, will call me when they need work done but, when they feel they need to cut back, they spend less on things they don't necessarily need. I make a lot of my money on things they don't necessarily need. As far as the rich creating jobs, they create some. As you had stated, there are different kinds of rich. The ones I work for are mainly executives and I do not work in or for their companies.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Very interesting take, Keith, although I suspect that when the dust settles, your clients would come back because they love their perks.

To rehash my take on taxes, y'all, is to do away with income taxes altogether; taxing income doesn't make economic sense given it is a disincintive for people to supply labor and therefore a depressant on demand.

What should be taxed is consumption, something that is much more difficult to do, but much more effective economically. A national sales tax fits the bill nicely but is politically not feasible.

The next best thing is a flat tax, in my opinion, after an initial exclusion of the first $50,000 earned, regardless of source. I would also exclude all income earned from interest on any type of savings account. I would then tax all remaining income, regardless of source at some flat rate, with one exception. The exception would be for a narrow definition of capital gains earned in the direct capital investments into businesses for the sole purpose increasing business profits where one of the main assets of the company is personnel. (My, ah, eh, personal bias is showing, sorry)


Keith Sutherland1 profile image

Keith Sutherland1 4 years ago from Rural Tennessee

Thank you My. I'm with you on consumption and flat taxes, simply because they take out the loop holes and make filings easier. Others will disagree and that is fine. My take is very simple. I'm a carpenter and I make my living, for the most part, building things people don't actually need. I will build, repair or install anything anybody wants, for a fee. My bread and butter is rich people that want things they don't need. There will always be people willing to pay for a nicer bathroom, kitchen or party area simply because they want it and can afford it. It's nicer when they are at ease with their money. Tax them more, they are less at ease. Of course, this is just what I have noticed over the years.


secularist10 profile image

secularist10 4 years ago from New York City Author

Keith:

Certainly, taxes should be as low as possible for everyone, the rich included. But ultimately if those tax monies can be used properly, it will benefit everyone in society even if it hurts some in the short term. This is why rich people in many European countries are happy to pay very high taxes--because they know they are getting the best healthcare, schools, public safety, pensions, roads, airports, clean food and many other goods.

The fact is, over 90% of the value of the economy is things people don't need. The only things anybody really "needs" is food, air, water and shelter. We don't really need consumer gadgets, penthouses, cars, TVs, energy drinks, most clothing, alcohol, or most other things that are produced in the economy. So the rich are not unique in that respect.


secularist10 profile image

secularist10 4 years ago from New York City Author

My Esoteric:

You correctly point out that an income tax is a disincentive on labor, but you have to remember that a sales tax is a disincentive on spending, which is just as essential to the economy.

A national sales or VAT tax would generate significant revenue, certainly. Although I'm not sure if that alone could replace the revenue raised from the income tax.

I agree with no exceptions for income tax--income is income, whether it comes from labor, investment, or anything else. I don't agree with your specific exemption of a particular kind of investment.

But I certainly do not agree that a flat tax is a great alternative to the progressive income tax. It is certainly much worse. It delivers a fraction of the total revenue, and why should someone who earns $1 million pay the same tax rate as someone who earns $100 million? An order of magnitude higher income, yet the same tax rate? Hardly seems fair, given what I explained in my hub on the *moral* justification for a progressive tax.

In a way, that is very similar to our current system: people at the lower end of income pay little or no income tax (after transfer payments are accounted for), and then from several hundred thousand dollars and up, it is a flat rate--a typical small business owner pays the same rate as a CEO of a multinational corp. That is bad economic policy.


nicomp profile image

nicomp 4 years ago from Ohio, USA

''Nicomp, only in the sense that the employees in the local McDonalds store work for free."

Except that McDonald's optimizes the production of those employees. And my participation is optional. And they are at-will employees.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

That is neither here nor there to my point. I already included that taxes are often an "unwilling" payment for services you may not want; you may not want the gov't to provide an interstate highway system, but provide it they do, partly funded by your taxes.

Also, whether a service is delivered efficiently or ineffciently is also mute, it just changes the cost of the overhead of delivering the service, you are still receiving a service, albeit at a higher cost.

My point is, your tax dollars are for buying a service, not how efficiently it is doing it; that is a different question.


nicomp profile image

nicomp 4 years ago from Ohio, USA

It's completely to your point. Providing a service is no excuse for inefficiency or sloth. Taxes can be concurrently unwillingly paid and efficiently delivered.

By the way, please accept my admiration for your willingness to debate. You are truly a good citizen of HubPages.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

I appreciate your admiration Nicomp, you have mine as well. I have found some who do get tired of my doggedness, unless defeated by good facts or good logic.

Back to this though. My initial hypothisis was "All a tax is, is payment for a service, no more, no less." I didn't say anything more than that. When I pay my cell service bill, I am simply forking over money for wireless service; it says nothing regarding its quality or efficiency of operation.

Unless it is a monopoly, I could chose not to use that service, which then means me paying the bill DOES say something about quality/efficiency. But, if it IS a monopoly, then we are back to quality/efficiency meaning nothing; I have to pay the bill regardless, unless of course, I want to live in the world without telephone service (presuming, for the sake of argument, there are no other alternative forms of communications available other than yelling.)

Now we are close to paying a tax where quality/efficiency mean nothing relative to paying the tax; you pay the tax, you receive a service. Period.

Then we move on to the next hub about influencing the quality and efficiency of the service being provided for that tax payment or even IF that service should be provided at, therby lowering our tax burden.


nicomp profile image

nicomp 4 years ago from Ohio, USA

" When I pay my cell service bill, I am simply forking over money for wireless service; it says nothing regarding its quality or efficiency of operation."

I disagree completely. Ongoing payment for a retail service is a positive vote in favor of that service. If your cell phone company went bankrupt and turned off your service, you probably wouldn't continue to pay your bill.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

That is true, but beside the point. If my gov't went out of business, I would stop paying my taxes as well, is the corrollary. OR, if I still had to have cell service, I would find some other carrier to continue paying for the service. In ALL cases, it is a service I am paying for or not paying for.

Approaching it from the opposite direction, while I say that I am expecting something in return for my tax dollars, in another respect, I hope I get nothing. For example, when I pay taxes for defense, I hope we never have to use the military, that all they ever do with my money is buy equipment, pay soldiers, and train, train, train.. My fervent hope would be that every dime I pay in taxes for the service of defense is money I hope never to actually see used for that purpose for real, but be available only for the potential use.


nicomp profile image

nicomp 4 years ago from Ohio, USA

" In ALL cases, it is a service I am paying for or not paying for."

Except for the voluntary and involuntary components. I can walk away from my cell phone provider and the IRS won't put me in jail. I also get to pick from a variety of cell phone plans. The IRS won't allow me to direct my taxes to particular programs.

" My fervent hope would be that every dime I pay in taxes for the service of defense is money I hope never to actually see used for that purpose for real, but be available only for the potential use."

Yes, we all hope that defense spending buys us an extremely good deterrent without actually breaking anything or killing anyone.


nicomp profile image

nicomp 4 years ago from Ohio, USA

Call me simplistic, but I cannot get beyond the fact that 45% of households paid zero income tax as recently as 2010. How we could possibly ask 'the rich' to pay more before we ask half of the country to pay *something* to support their federal government just baffles me.


secularist10 profile image

secularist10 4 years ago from New York City Author

Nicomp:

Half of people don't pay tax because they don't have any money.

Almost all of the money in this country is earned by the minority at the top.


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL

Nicomp - "Except for the voluntary and involuntary components. I can walk away from my cell phone provider and the IRS won't put me in jail. I also get to pick from a variety of cell phone plans. The IRS won't allow me to direct my taxes to particular programs."

Absolutely true, every word of it, but, how does what you say not make what the gov't provided for your tax dollar, want or unwanted, not a service. What if I didn't want the gov't to provide a national defence? Does that mean national defense is now not a service the gov't provided because I didn't want them spending my tax dollar on it?

Question, what % do you suppose, of that 45% that didn't pay any income tax earned over $250,000? The answer, I can guarantee you is not zero.

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