Wednesday, July 07, 2010

Ignorant Politics of Envy on a Rampage

Attention to the chattering classes these days leads to one and only one conclusion: the left is speaking with one voice to raise taxes and government spending even more than they have been raised already.

We are hearing once again in wholesale quantities about income inequality, i.e. the alleged problem that the incomes of the wealthiest have been growing faster than the incomes of the less wealthy. The proffered solution to such is, of course, to tax the wealthiest and spend the receipts to benefit the less wealthy, thereby addressing the inequity and all its injuriousness.

Noisiest in this direction is, predictably, The Nation, whose unapologetic socialism always invites such assertions. Their publication on the brink of insolvency itself, the reddish editors presently offer a symposium on the subject of redressing income inequality with higher taxes. That is, it's a symposium with but one point of view.

These days, however, such stuff isn't passing muster with many of its natural adherents. WaPo's Ruth Marcus, whose liberal credentials are utterly intact, today loudly objects to such cries for soaking the rich. Her notion is true: that tax receipts from rich folk, even if rates are raised to the stratosphere, won't touch the present fiscal crisis of profligate spending. The arithmetic is simple enough.

But Marcus doesn't depart from her lefty moorings, because she misses the real points. These are three, largely related to each other:
  • It is a matter of indifference to the welfare of the less well off if the more well off are doing lots better, if at the same time the lot of the less well off is also improving. Marcus notes that the prosperity of our Republic's lower earners has improved in the last few decades at roughly the same rate it did in the "golden era" of the 1940s through 1960s. What's different is that more recently, the income of the tippy-tops has exploded. How Bill Gates or George Soros' billions are a drag on the life, liberty and pursuit of happiness of the plumber or school teacher is unfathomable, unless we indulge the human penchant for envy.
  • The wealth of the wealthy doesn't sit idle in their bank accounts. It becomes the capital that finances new enterprises and fuels existing ones, the stuff by which ideas become realities, creating jobs and wealth. For the middle and bottom to do better, money has to be invested. That's what happens to the money made by the top earners, whether they invest directly, consume, or simply bank the dough. Taxing Richie Rich doesn't put his money in the hands of the Lumpenproletariat better than leaving him alone. Taxes simply put the decisions in the hands of politicians rather than industrialists, bankers and others whose eye is on productivity instead of the next election. If you want the middle and bottom to do well, then, it's best to let the top keep more of its money, not less.
  • Time and again, tax revenues increase when marginal tax rates drop. When folks with dough are freed from concentrating on avoiding taxes, they invest in ways that earn them more money, which even at lower tax rates yields bigger tax revenues.
In sum, taxing the rich to solve our fiscal crisis is utterly counter-productive in every way. It doesn't benefit the less well off. In fact, it makes it more likely that they'll stay less well off, as taxes stifle economic growth. And it makes it more likely that their government will be less solvent than it is presently, a most sobering prospect.

Note well that all this is merely the details of the second SWNIDish aphorism: Socialism impoverishes.

Note also that when thoughtful pundits decry "static" estimates of the effects of tax increases or tax cuts, they decry the way such estimates ignore the effects of taxes on economic behavior, as we've been noting them. Yelling that the Bush tax cuts "cost" the gummit eleventy trillions normally involves just such antimathematical reasoning, which should've died around the time of Newton.

So what explains the outcry of the left to raise taxes on the rich? It could be ignorance of macroeconomics. But these days, such ignorance must be willful. If you claim to care about the poor and fail to learn the most fundamental notions of the economics that explain poverty, your failure is culpable.

We think this nonsense has to do with what really motivates some on the left. It's not the welfare of the less well off. It's resentment against the prosperity that leftists see as morally and intellectually inferior to themselves. They'd rather have a world that punishes the rich than one that lifts the poor.

Note well that simply reducing tax rates is not the solution to all the ills of poverty. Deliberately pursuing ways to enhance the productivity of the bottom 20% of earners is laudable goal over the long term. That's why SWNID affirms informed efforts to break the so-called cycle of poverty, and "informed" means with a understanding of the issues unclouded by ideological a prioris and a grim grasp of the limitations of all such efforts.

But if you want to keep the poor unproductive and so make them poorer, tax the rich. Which is exactly what the self-styled advocates of the poor are insisting we do.

1 comment:

JB in CA said...

"How Bill Gates or George Soros' billions are a drag on the life, liberty and pursuit of happiness of the plumber or school teacher is unfathomable, unless we indulge the human penchant for envy."

I disagree, unless we interpret "life, liberty, and pursuit of happiness" in strictly economic terms. (And even then I think it's probably wrong.) The wealthy, because of their wealth, are able to manipulate and even circumvent the democratic process. ("If we don't get our way, we'll take our bat and ball and go elsewhere.") And the wealthier they are, the more they can (and do) manipulate and circumvent it. So Gates's and Soros's billions are indeed a drag not only on the plumber and the school teacher but on anyone else whose life, liberty, and pursuit of happiness depends, at least in part, on a healthy democratic process.

Having said that, I agree that tax cuts are very often the best way to stimulate the economy (and for the reasons you give). But obviously, they're not always the solution. There will come a point at which the taxes collected from new jobs will not be enough to offset the reduction in taxes that created those jobs. (Translated into economics-speak, tax cuts have a diminishing marginal utility.) Otherwise, we could maximize revenue by eliminating taxes altogether.

The trick, of course, is to find precisely where that point (margin) is. Given our current economic situation, I'm not convinced that we haven't already reached it. One reason for my uncertainty is that many and various companies across the country are still refusing to hire new workers, not because they lack the resources to do so, but because they fear there will be a double-dip recession. And a tax break, it seems, would simply add to that fear, since it would put the country as a whole even deeper in debt. (A tax increase would no doubt add more to that fear than would a tax cut, but that's another issue.)

But let's suppose I'm wrong about all that. It still isn't clear why you would limit your proposal to an across-the-board tax cut? If a tax cut for the wealthy really would increase jobs and, in turn, tax revenues, why not freeze taxes on the non-wealthy and eliminate taxes altogether for the wealthy? That way, the wealthy could produce an even greater number of jobs and, thus, more tax revenue. Is it because that would make you envious of the wealthy? I doubt it. Is it because you'd rather punish the rich than restart the economy? Unlikely. But why, then? I'm really curious.