Taxing the Wealthy
Two recent articles
The Need to Tax the Wealthy
The quest to increase taxes on the wealthy is not a gratuitous attack on upper income households; it is driven by the need to raise more revenue to run the government. While many deficit hawks been irresponsible in raising fears of an impending collapse of the American
government, the projected deficits for years following the recovery are in fact larger than is desirable.
There are areas of American spending at the federal government level that could be reasonably cut, but even after we have zeroed out the "waste, fraud, and abuse" category of federal spending we will still likely need additional revenue of between 1-2%t of GDP to keep budget
deficits in an acceptable range. That leaves a choice between increasing taxes on the wealthy or imposing more taxes on the middle class.
The vast majority of the income gains in the United States over the last three decades have gone to the richest 5% of the population, largely as a result of policies that were explicitly designed to redistribute income upwards. Therefore it is far more appropriate to tax the richest
5%t of families who have prospered than the broad middle class who have suffered.
Of course taxes can be designed in a better or worse manner. The best way to increase taxes on the wealthy, in addition to allowing the Bush tax cuts to expire, would be to apply a modest financial transactions tax (FTT).
There is a long history in both the United States and the rest of the world with FTT. Until 1964, the United States imposed a tax of 0.12% on new stock issues and 0.04% on stock trades. Britain still has a tax of 0.25% on each stock sale or purchase, raising five billion pounds a
year. This would be equivalent to roughly $30 billion a year in the American economy.
Robert Pollin and I calculated that a scaled set of FTT on stock, futures, options and other financial instruments could raise approximately $150 billion a year. This would go far towards bringing the long-term budget deficit down to a manageable level.
A FTT would be hugely progressive. While many middle income families own stock, their holdings are dwarfed by the holdings of the wealthy. Furthermore, few middle income families are active traders. Their intention is to hold their stock to support their retirement or their kids'
education, not to shuffle it around on a daily or hourly basis. Some mutual funds do engage in frequent trading. An FTT would encourage investors to move their money to funds that are less active traders, thereby allowing them to escape most of the impact of the FTT.
Most of the burden of the FTT will fall on wealthy individuals who are active traders and also on the financial industry itself. Either way, the tax will be overwhelmingly borne by the wealthy. By raising the cost of trading, the tax will discourage the trading that provides the revenue
for the financial industry. A well-designed tax should also discourage the creation of exotic assets that may serve little useful purpose, since it could lead to the tax being paid multiple times. For example, the holder of an option on a stock would both pay the tax on the purchase
and sale of the option and also on the purchase and sale of the stock itself, if the option was ever exercised.
While most taxes impose some economic cost in addition to the revenue raised, a FTT may actually increase economic efficiency. By discouraging financial transactions that are entirely rent-seeking in nature, a FTT will reduce the resources used up by the financial sector,
without affecting at all its ability to serve the productive economy. The reduction in trading volume will of course reduce liquidity to some extent, but American financial markets will still be quite liquid. Even with a 0.25% tax on a stock sale or purchase, transaction costs will still
only be raised back to their mid-80s levels. And, the United States had a large and very liquid stock market in the 80s.
There also is a powerful element of justice in imposing a FTT in the current situation. The main reason that the budget situation has deteriorated so much in the last two years has been the damage caused by the irresponsibility and greed of the financial industry. In this way, a
FTT can be seen as sort of a user tax, where the industry is effectively forced to pay for some of the damage caused by its practices, just as we might like to tax the output of industries that pollute our air or water.
In short, there is a very good argument for increasing taxes on the wealthy given the current budget situation. The alternative is taxing those who are not wealthy. And, there is no better way to tax the wealthy than to tax their gambling in financial markets. A financial
transactions tax will raise revenue at the same time that it makes the economy more productive. This is a genuine win-win situation.
[Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published
Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.]
Should We Double Taxes on the Rich?
April 13th, 2009
We live in a sound-bite political culture. Politicos and policy makers hardly ever engage their opposite numbers in anything close to real debate. Instead, they inflict upon us carefully rehearsed talking points. And the rest of us usually don’t particularly mind — because we’re not
paying much attention anyway. We’re not paying attention because the talking heads are seldom speaking to ideas bold enough to move us. Still, every once in a while a real debate, on an absorbing question, does break out. Then we realize what we’re missing.
One of those rare moments began last week, in a formal — and fascinating — online debate that will end this Wednesday. The host: the Economist, the prestigious British business magazine, The proposition before the house: that “the rich should pay higher taxes.”
The Economist has invited two sparklers to do the debating. Arguing the affirmative: French economist Thomas Piketty, whose work has traced the income explosion at the top of the U.S. economic ladder. His challenger: Chris Edwards, a former senior economist with the
congressional Joint Economic Committee now with the Cato Institute, a leading conservative think tank in Washington, D.C.
The debate is following the classic format: opening statements, rebuttals, closings. But the Economist has also thrown in some cyberspace wrinkles. Guest experts are commenting on the debate’s exchanges, and readers can join in to the discussion — and vote for and
against the proposition.
The sum total of all this: the “richest” exchange on taxing the rich in years.
And this exchange, notes Economist debate moderator Saugato Datta, could hardly be more timely. With the world in economic crisis — and America’s top 0.1 percent taking in four times more of U.S. income than they did a generation ago — even those who consider
inequality a “necessary price” to pay for a system that “rewards success,” says Datta, are “asking whether matters have got out of hand.”
To get things in hand, Thomas Piketty proposed Tuesday, in his debate opener, an 80 percent top tax rate on all income over 1 million euros, or $1.3 million. This 80 percent rate — twice the top rate that President Obama is now proposing — rests on a historical foundation.
Between 1932 and 1980, the top U.S. tax rate averaged 80.2 percent.
A rate that high today, argues Chris Edwards, “would be disastrous.” The nation’s highest-income taxpayers would reduce their “work effort.”Overall output and tax revenue would quickly plummet. Edwards, to give a sense of the enormous losses he feels Piketty’s tax hike would
generate, goes on to cite calculations by former White House Council of Economic Advisers chair Martin Feldstein.
Back in 1993, Piketty responds, Feldstein applied his theoretical perspective to Bill Clinton’s proposed top tax rate increase — from 31 to 39.6 percent — and predicted a substantial drop in taxable income if Clinton’s hike went into effect. No dropoff actually took place, a detail
that didn’t stop the Bush White House from getting the top tax-bracket tax rate dropped to its current 35 percent in 2001.
The most gripping exchanges between Piketty and Edwards, overall, have so far revolved more around basic philosophical assumptions about the nature of work and reward than questions over how well economic theories can explain actual economic behavior.
Taxpayers in the highest-income brackets, Edwards contends, generate their high incomes “by their own efforts.” They produce “items of value to others.” Exceptions — “high-earning CEOs who perform poorly” — do exist, he acknowledges, “but it doesn’t make economic sense
to impose exorbitant tax rates because of the exceptions.”
The income most of us make, Piketty concedes, does reflect the contribution we make “to total economic output.” But this link between productive effort and economic reward breaks down at our economic summit, where top-earners like CEOs have the power to skim off
whatever they can grab.
Top execs “will keep setting their own pay to the highest possible levels,” Piketty contends, “as long as they are not prevented to do so.” How can we do this preventing? History suggests, he answers, “that highly progressive taxation on very high incomes is the most efficient
way to achieve this goal.”
High taxes on high incomes, Piketty adds, can “curb the grabbing hand.”
But it we let government grab too much in taxes from the rich, retorts Edwards, we will have started ourselves down a slippery slope to tyranny.
“The government that persecutes certain people with 80 percent tax rates,” he charges, “will find it much easier to expropriate the property of other groups it deems to be a menace.”
And even if this nightmare should not materialize, Edwards holds, high taxes on high incomes still make “no sense” because rich entrepreneurs remain far “more likely to use the cash productively than the government.”
That argument — that the private sector always knows best — may not be resonating particularly well in our epoch of meltdown and Madoff, even among the Economist’s business-oriented readership. As of this past weekend, readers, by a 52 to 48 percent margin, were
favoring the Piketty position.
Piketty and Edwards will file their closing arguments this coming Wednesday. The Economist will pronounce a winner Friday.
In one sense, the Economist’s official choice won’t matter. By having the opportunity, at long last, to debate the wisdom of really taxing the rich, our body politic has won already.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.
April 14th, 2009 at 11:10 pm
When , after 8 years of financial struggle, I sold my business for 10 million dollars, that year I would have had a tax of 80% of 9 million under your proposal. That would have been a disincentive to me as an entrepeneur. A better idea is to add an annual wealth tax of, say, 1 or
2 percent. This averages out one-time gains.
April 14th, 2009 at 11:47 pm
In the mid 20th century, when the tax rate on income in the top bracket averaged 80.2 percent, the U.S. tax code had a provision for “income averaging.” This “income averaging” allowed taxpayers who received a much larger amount of income in one year to average that
income over several years, in the process lowering the applicable tax rate.Income averaging ended in 1986, when Congress cut the top tax rate to its all-time low. We need to restore income averaging — and the high top marginal rates that went with it.