Should the Rich Be Taxed at All?

December 23rd, 2010
in Announcements

Weekly Economic Review and Op Ed by Steven Hansen

Econintersect has focused on the stimulus part of the tax law in Tax Law Stimulus - tax revenues of approximately $554 billion will have been foregone and GDP growth will have benefited by $368 billion - just in 2011.

GEI has not done the same analysis for 2012, but a quick look indicates that about $300 billion in tax revenue will be foregone and stimulus benefit will somewhere below $100 billion.  Net effect of the new tax law for 2011-12 will be an increase in the national debt by something around $400 billion more than economic activity is increased.

Warning bells should be going off when the increase in government spending is greater then the growth of GDP.

Follow up:

The majority of the new tax law was designed to maintain the status quo.  Even the extension of the 99'ers unemployment  insurance benefits was a social program keeping the unemployed earning money.  Without this law,  the GDP would have fallen in 2011.   There is little argument this new tax law was necessary IF the objective was to maintain the status quo.

The controversial portion of this legislation was extending the Bush tax cuts to the rich.  Much has been written on this topic.  Should the rich shoulder more of the load of financing the government?

Consider that a sovereign government with its own fiat currency does not NEED to tax - but taxes to achieve social and fiscal objectives.  Consider why we tax:

  • Redistribution of Wealth. The wealth disparity in America is growing.  The social fabric of a country is strained when the poor become too poor (or the number of poor increase).  Taxes are used in an attempt to correct this imbalance, the problem is that the redistribution to the poor is not being done in a manner to stimulate / help the poor improve their lives - and the current method only acts as a safety net to prevent the poor's existence from becoming intolerable.
  • Encourage National Policy Objectives. It has been the stated policy of the every American administration since WW2 to foster home ownership - and the government uses its tax policies to ease the tax burdens on homeowners. Another government encouragement is for investing in means of production through a lower capital gains taxation rate.
  • Economic Accelerator / Decelerator. Higher taxes slow an economy down by removing money from the economy while lower taxes accelerate an economy.  Taxing interest income penalizes savings, and encourages spending.  Deducting interest paid encourages deficit spending.

The unfortunate fact is that it is rich people who provide the investment money – and this money is now leaking overseas funding growth in Asia, or being used to profit in activities which do provide a societal benefit.

It is the only the rich who can provide the funding for real growth which provide new jobs.  America has morphed its taxation incentives so that it is more profitable to make money investing in activities that do not produce real economic  growth. Making money on stock movements or ultra-high leveraging of risky financial assets that only benefit the speculators have limited societal benefit.

It was the initial investment which created the benefit to society - the rest is speculation.

The American national tax priorities are geared towards consumerism and a wide interpretation of capital investment - with much of the capital benefits only rewarding the investor.  There are systemic fault lines in our thinking about taxation.

Hat tip for this editorial cartoon that mentions the strangely familiar “unemployed dollar” phenomenon to News from 1930.  Should money sitting idle be taxed?

Conversely, should money spent or earned which serves strategic national economic objectives be taxed at all?

Economic News this Week:

Econintersect economic forecast for December 2010 estimated level or slightly negative economic growth.   This week the Weekly Leading Index (WLI) from ECRI improved from -0.1% to a positive 0.8% implying the business conditions six months from now will be roughly the same as today.

Initial unemployment claims in this week's release were relatively unchanged, and are at levels where minimal jobs growth is possible.

No data released this week was inconsistent with Econintersect’s November forecast of slow growth.   The table below itemizes the major events and analysis this week (click here for interactive table).

Bankruptcy Filed this Week: Cardima

Bank Failures this Week: None

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  1. derryl says :

    Good commentary. Most of what passes for ‘analysis’ of fiscal and economic issues is merely slogans repeated, apparently without understanding, from the various schools of economic theory.
    “Taxes kill jobs.” Well, not always. If a trillion dollars is lying idle or is speculating for casino winnings in financial markets, that money is producing no productive jobs at all. If that trillion dollars was taxed and spent by government rebuilding infrastructure, millions of jobs and enormous physical wealth (economically necessary infrastructure is fixed capital, which is real wealth) could be created by that money. “Taxes create jobs”, can be just as true as its opposite. The favorite answer given by my Econ 101/102 prof was, “It all depends.” The lady was no blind ideologue, and after nearly four decades she continues to be right.
    Savings or retained earnings that are not reinvested in the productive economy produce no wealth, yet people seem to feel entitled to earn returns on their money just for having it sit there. Automakers earn a significant percentage of their profits not by making cars, creating wealth, but by financing auto purchases. Finance is still earning 40% of all corporate profits in America. There is something seriously wrong with this situation, and perverse tax incentives and regulatory burdens likely have a lot to do with it.
    Buying dividend paying stock to share in the ownership and profits of productive corporations is a legitimate way to earn returns on your money. This is called “investing” and it’s one of the foundations of the capitalist economic system. Businesses spend investment money to build productive capital like farms and factories, and that fixed capital keeps producing wealth long after the initial investment in construction. A capital rich economy is a massively positive sum wealth generating machine. Ownership of some of that capital entitles you to a share of that ongoing wealth production.
    The company got money by issuing shares in an IPO or a subsequent stock offering, and once those shares are on the market people who want to change their investment mix or cash out are free to sell their shares to others. After the company sells the original shares there is no further investment in the company. But there are people who want to sell an investment in that company and there are people who want to buy it, and this is a socially useful function of stock markets.
    Buying company stock in the hope of reselling it for a capital gain is “speculating”. Speculators are not looking to share in the profits of a productive business. They are looking for a greater fool whose money they can win in casino bets on the direction of stock prices. For every winner of a capital gain, there is the loser of an equal capital loss. Speculation is a zero-sum financial system that generates no additional wealth. It just creates winners and losers. Speculating is not a socially useful activity but as long as people are losing their own money and not looking for bailouts, no problem. Goldman Sachs has entire quarters with NO loser trading days, so if the casino is not fixed it sure does a good job of acting like it is. Place your bets and take your chances.

    Steve wrote, “The American national tax priorities are geared towards consumerism and a wide interpretation of capital investment - with much of the capital benefits only rewarding the investor. There are systemic fault lines in our thinking about taxation.”
    It is a legitimate question whether casino winning capital gains should enjoy the same or better tax treatment as a guy who spends 30 years building and operating a successful productive company then sells it for big bucks when he’s tired of working 12+ hours per day. The former guy “won” his gain from some loser by buying low and selling high or by shorting. No wealth and no social benefit was created in this process. The latter guy “earned” his gain in the process of producing a great deal of real wealth over 30 years of work.
    If, as Steve asks, we’re going to have taxes to achieve social and fiscal objectives, then we need to be asking what kinds of gains we will encourage and what kinds we will discourage. Our answers to these questions will determine what kind of economy we have, a productive jobs sustaining economy, or a speculative win-lose casino economy.

  2. Douglas Roberts Email says :

    Let's not demean all investment as useless. It may be that we've got less activities to invest in than we used to have, but that does not mean that investable funds are useless.

    The yoke of huge government will just drag the country down.



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