Should we raise the tax rate on wealthy people?

Here’s my attempt at using the Costco Connection format to look at this question from both sides.

Yes

What the experts say: Economists tell us that wealthier folks have lower utility for each marginal dollar than less wealthy folks, because they have more than met their basic needs.

Or, as most people believe, the wealthy can afford to pay more than the less wealthy.

The wealthy benefit more from government, so should pay more to support it.

Tax rates can help us remedy unfair income distributions.

No

The wealthy already pay more than the less wealthy.

It’s presumptuous of us to feel we have the right to demand more from the wealthy than we are willing to give ourselves.

Even if it’s true that the wealthy have less utility for each additional dollar than the less wealthy, that’s not the right comparison. Wealthy people have higher utility for each additional dollar than government bureaucrats have with other people’s money.

Diminishing marginal utility is not a good argument for taking stuff from people. If I stole all the stuff in your attic, would you accept my argument that what I did was right because you weren’t using it?

Everyone benefits from government and it’s fair to expect everyone to pay something for it.   In any situation where a minority pays for the majority of something that everyone benefits from (or thinks they benefit from), the tendency is for the majority to demand more and more, because it costs them nothing to do so.

Tax rates do not remedy envy. Higher tax rates on the wealthy can contribute to perceived income inequality, as wealthy folks respond to the incentives of their after-tax pay, not their before-tax income, while inequality is often based on gross income. In other words, if you raise taxes on the wealthy, they’ll seek to make even more income to make up for those higher taxes.

Higher tax rates also encourage the wealthy to make adjustments in their lives to avoid paying those taxes. Wealthy folks moved from England and France after those countries passed higher tax rates on the wealthy, for example.

My opinions

I think we spend too much time talking about tax rates and not nearly enough time talking about government spending.

I think everyone, no matter how rich or poor, should pay something.

I don’t begrudge the wealthy of their wealth, especially the wealth of those who have earned it fair and square. That means they’ve added value to society, something we fail to consider as we salivate over ways to take it from them.

Even with 20/20 hindsight, I’m appalled at how we fail to see that earned wealth often carried with it gut-wrenching risks, previous failures and an extraordinary amount of persistence against the odds. We act as if it was a given.

I don’t accept that wealthy people have less marginal utility for an additional dollar than the less wealthy. If that were true, I would expect to see more evidence of that in the financial behavior of less wealth people.

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3 thoughts on “Should we raise the tax rate on wealthy people?

  1. If “wealthier folks have lower utility for each marginal dollar than less wealthy folks” AND this implies that they are less “impacted” when the government takes those marginal dollars away, it is equally reasonable to assume that they have less incentive to produce those dollars than less wealthy folks. If those wealthy people did not value those marginal dollars (or the stuff they could buy with those dollars) more than the time and effort they exchanged for those dollars, they wouldn’t have wasted their sweat earning them. But you knew that!

    I think Obama is too focused on “fairness” – whatever that means – and ignores the economy. His goal seems for all people to be equal even if they are all equally destitute. In fact, it may be more correct to say that Obama has used the “fairness” rhetoric to create an illusion that our economy – and the middle class – is suffering, not because the federal government is spending (wasting) too much money, but because the “rich” (as he defines that from time to time) are not contributing as they should. He has painted himself as a white knight trying to help the average man against those Obama labels as their foe. the rich, i.e. they guys who create the jobs, and he has done this for purely selfish reasons – to keep HIMSELF in power and rich for life.

    Fairness (as Obama defines it) and equality (of outcome) will not make our lives better. That will occur only with an expansion of our economy, i.e. if we produce more goods and services per capita than we do today. Indeed, inequality – or the resulting desire for one to close the gap between himself and someone better off – serves as an incentive for people to increase their productivity. By guaranteeing equality, we can guarantee equality, but we cannot guarantee that people will be better off. Rather, guaranteeing equality virtually guarantees that people will be less well off. So we have to ask ourselves if our goals is to be better off or if we want to figuratively cut off our noses to spite our faces in the name of equality and “fairness”.

    Fairness, as Obama defines it, is an after-the-fact regret by one party that he is relatively less well off than another party (even if he is better off in absolute terms). Fairness, as I define it, means that both parties honor their contract. If I agree to sell you a barrel of apples for $10 and you agree to buy my apples for $10 – even though the market price is $5 – that is a fair deal as long as we both willingly agree to it. You wanted the apples more than you wanted the $10 and I wanted the $10 more than I wanted the apples. If we cannot agree that our mutual agreement to engage in the transaction defines it as fair, we must then assume that some third party, e.g. the federal government, has the right and duty to set a “fair” price or conditions for our exchange. But this assumes that there exists some government official who know what’s in my best interest and knows what’s in your best interest and has no interests of his own (which, by virtue of the fact that he’s a government official and has his job by virtue of currying favor, is a contradiction).

    We need to focus on incentives that encourages unproductive people to be productive and productive people to be even more productive. Instead, we punish those who are the most productive and reward those who are the least productive. THIS IS NOT ROCKET SCIENCE! Improving productivity is what makes people’s lives better. Ensuring fairness is what makes politician’s lives better.

  2. Pingback: Should we have a minimum wage? | Our Dinner Table

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