Basic Economic Truths, Part III ~ Why the Rich Pay Higher Taxes

As the old saying goes: “The rich get richer and the poor get poorer.” That is the natural laissez-faire process of an “unconstrained” free-market economy — putting ME over WE.

opaJuly 27, 2009 — I have always been a Star Trek fan. Through its various incarnations, Star Trek has been a series of morality plays, both on TV and later in movie theaters. It highlighted moral issues, either implicitly (the “first interracial kiss” on TV), or explicitly, as with the Prime Directive.

One of the most memorable instances of a “moral teaching moment” in Star Trek was in the movie, The Wrath of Khan. Faced with imminent destruction after the Genesis Device went kaput and the Enterprise’s engines conked-out, Mr. Spock made a timely decision. He heroically sacrificed his own life in order to save the day. Later, he justified his choice to Captain Kirk as being perfectly logical when he said:

“The Needs of the Many Must Outweigh the Needs of the Few — or the One.”

The needs of the many vs. the needs of the few, or the one… heavy — the difference between self-interest and common-interest. At its essence, it’s the difference between civilization and anarchy.

My conservative friends often ask, one just did last night as a matter of fact, “Is it a crime for people to be rich?” What my friend was alluding to is the more basic question, I think, “Why should the rich have to pay higher taxes?”

Bear with me as I attempt to tie this basic question to the Star Trek example of common-interest. I used to wonder about this question myself before wiser people like my wife’s dad (we lovingly referred to him as Popo,) was able to help me understand.

First, to the “surface” question, “Is it a crime for people to be rich?” No, of course not. But how one gets rich, to my mind, is often criminal — even if they broke no laws in the process of accumulating their wealth. For example, the bankers and other senior executives on Wall Street pocketing millions each in salary and “retention” bonuses after what they did to our economy, and especially after their companies have accepted billions in TARP and bailout dollars from taxpayers. They have no shame!

It is a real crime to evade taxes, which some wealthy people (maybe many) do with bogus charitable contributions and offshore, secret savings accounts (see this business report from last year on the details). When they do, for whatever reason, they are depriving society/government of the revenues needed for essential programs like defense, homeland security, education and, community services. Perhaps, if more of the wealthy paid their legal shares, their tax rates would not have to be so high.

But to the “underlying” question, why higher income folks should have to pay taxes at a higher rate than most of us. It’s because wealth accumulates over time and does not re-circulate to help drive our economic engine. It is spending that fuels the economy, not saving, and the wealthy save at a  much higher rate (called the marginal propensity to save) than do the poor and middle classes. Business investments, which often do come from the wealthy, do not lead economic recovery; they only follow it to take advantage of improving economic conditions.

Forget about “trickle-down” economics. Most serious economists today reject the idea entirely. One famous economist critical of this theory, John Kenneth Galbraith, summarized trickle-down theory as “horse and sparrow” economics: “if you feed enough oats to the horse, some will pass through to feed the sparrows.” And, before he became Vice-President under Reagan, George H.W. Bush had referred to this theory as “voodoo economics.”

So, as the old saying goes: “The rich get richer and the poor get poorer.” Or, another true-ism,”It takes money to make money.” That is the natural laissez-faire process of an “unconstrained” free-market economy.

According to news reports still on the Internet, Warren Buffett, the billionaire founder of the investment firm Berkshire Hathaway Inc., went to Washington back in 2007 to ask Congress not to cut his taxes. Buffett said the super-rich should be taxed more, not less. In particular, Buffett urged the Senate Finance Committee not to repeal the estate tax which was scheduled to come up for a vote. He told the committee that he recently compared how much he pays in taxes in terms of a percentage of his salary to what his employees pay. The percentage he came up with, owing to the tax credits and deductions the tax code affords him, was 18 percent compared to nearly 33 percent most of his staff pays.

“Frankly, Mr. Buffitt said, “an economy where my receptionist pays a lot higher tax rate than I do does not strike me as a just economy.” He challenged the elite members of the Forbes 400 list to do their own calculations and compare their tax rate with their receptionists, and then consider his challenge that the rich should pay more. None, to my knowledge, from research on the Internet, have chosen to take him up on his challenge.

“I see nothing wrong with those who have been blessed by this society to give a larger portion of their income to the society than somebody that’s working very, very hard to make ends meet,” Mr. Buffett said. And I think Mr. Buffett is correct.

Also important to consider, according to basic, introductory textbooks on macroeconomics, our progressive income tax system is an important economic stabilizer.  More money in the hands of lower income individuals means more money spent — and more money being spent helps to keep long-range aggregate supply closer to “full production”, thus smoothing out the hills and valleys of normal business cycles.

So, the bottom line/economic truth is that we need a strong middle-class for economic stability, not a wealthier upper-class. Our progressive income tax, the minimum wage, and the so-called “death” tax, as conservatives are so fond of calling the inheritance tax, help to ensure middle-class strength (what President Obama referred to during his 2008 campaign when answering a question from Joe the plumber, using the phrase, “spreading the wealth around”). And that, my friends, is why the rich are expected to pay taxes at a higher rate.

Is this socialism? No, I don’t think so. It’s only logical. But many conservatives, like Joe the plumber, seem to think otherwise.

Feel free to comment, whether you agree or not.

Published on July 27, 2009 at 10:22 am  Comments (9)  

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9 CommentsLeave a comment

  1. Perhaps the progressive income tax would be more palatable to your wealthy friends if you described it as a progressive defense tax. The government is “defending” more wealth for them than for me so they should pay more.

  2. I agree completely! Too bad so many people in the US either do not agree, or are afraid to voice their opinions like you just have. Great job! Maybe you could send this in to an editorial column somewhere!

  3. Well, your first obstacle to understanding what is really happening out there is having learned mainstream economics. That stuff is vile, manipulative, inconsistent, contradictory, mystifying … and is therefore loved by politicians and the elite.

    I would agree with you in that the middle class is important. I believe it is the engine of our economy’s growth. It is in decline, with the vast majority of it sliding into lower class.

    But the reasons behind it can virtually always be traced to government intervention. This goes back to Rockefeller, JP Morgan, et al. (Actually, come to think of it, it goes back MUCH further – governments & rulers have been picking who wins and who loses since biblical times!) To blame the obvious unfairness and destruction of the middle class that we can all plainly see on laisezz-faire and capitalism is doing a great diservice to all of us hard working people, including yourself and your family. Blaming capitalism – rather than corporatism – is akin to throwing the baby out with the bathwater. And that is exactly what you and the Michael Moores of the world have been marching and voting for.

    I want justice. I want banks that took risks to feel the full outcome of those risks – bankruptcy. I want those who sold MBSs while being on the other side of the trade to be tried and jailed.

    But these couldn’t have happened in the first place without someone pouring the liquor. Without low interest rates and government guarantees, no one could have sold a sub-prime mortgage and all the mess that followed wouldn’t have been able to happen either. The executives in their ivory towers wouldn’t have made all the money either. Due to government bailouts, they kept their jobs so they can fleece the public again on another day.

    Again, you need to dig a heck of a lot deeper to understand the financial mess and how our leaders, economists, and media have given us all their special glasses that make them look good, rather than the villains they truly are. Again, don’t throw the baby out with the bathwater.

  4. Corporatism is simply Capitalism run-amuck That’s my stand. But thank you for your comment.

  5. I agree with you on some level, but corporatism can’t exist without government giving regulatory and economic benefits to one company or group at the expense of another. In a free market, no one has an advantage beyond another outside of skill. So, with this understanding, you can see that free markets and unbridalled capitalism are rare and haven’t existed here, in their purity, for decades. Up until about the 80s, the US was an economic power house since it produced so much under capitalism. Since then, the middle class has been getting gutted at the expense of the elites. We’ve been transitioning from a capital-based economy towards the -isms (corporatism, fascism, socialism, communism).

    So, why would we want to march further towards a system(s) that have robbed people of individual freedoms, kept progress at a minimum, kept living standards at a minimum, and disregarded human rights? Why wouldn’t we want to strip out all the crap that is burdening the middle class and benefits the elites to get back to the times when things were good for all? Again, you’ll find there is a strong corellation between government involvement (including the federal reserve) and the amount of things that go wrong.

  6. I beg to differ; corporatism doesn’t exist because of regulations governing commerce. It exists despite regulations. Corporatism exists, DM, because successful companies want ever-increasing success, ever-increasing profits. To survive in our system of monopolistic competition, they must grow, thereby eliminating the competition. Investors in stocks expect the price of their shares to grow. They expect dividends too. But because of anti-trust legislation, companies cannot have total monopolies. They must settle for being part of an oligopoly in which they collude to maximize profits within their respective industries. Big Oil, Big Pharma, Big Insurance, Big Box Retail and airlines are some examples.

    Capitalism is also an “ism”.

    In your last comment you spoke of throwing babies out with the bathwater. Well, are you not doing the same thing when you denigrate the study of economics (how things work in economic systems)? You don’t like the facts and conclusions that economists, who have developed and tested hypotheses and theories against real-world conditions for decades, agree upon. So you would throw out the baby first and the bathwater along with it preferring to trust instead your… what? Intuition? Prejudice?

    You speak of the elite as if they are societies’ enemies. Of whom do you speak? The wealthy? The educated? College professors? Politicians? All of the above?

    We do not have a free-enterprise system, DM… we haven’t had since the 1930s that you seem to think were so wonderful. My God, man! That was the decade of the Great Depression! What we have today because of the excesses that have existed and always will exist in monopolistic competition systems such as ours is “limited” free-enterprise. The limits protect the innocent, the poor and the middle-class who work for their keep.

    It’s okay to have an opinion, DM. But it would be better-respected if it were an informed opinion. Trust me, you don’t want to do away with the Fed, the Sec and the FDIC. You want them to do their jobs! You want them to prevent excesses in the financials. And you want government to limit the power and influence that the deep pockets of Corporations have within the system. Given the freedom to act, corporations will do the profitable things whether they are the rights thing or not. I cite for example Transfer Pricing to avoid corporate taxes owed on profits earned in this country.

  7. Where are you getting your stuff from, Opa? You sound like you went to the school of Stalin – or maybe Mouselini? Maybe with a twist of Naomi Klein and a dash of Noam Chomsky? They all believe that the natural progression of things is a takeover by a few to the detriment of everyone else. Ironically, this is not far from the truth. Only, it is government that does the takeover – via taking over the resources and entrenching their cronies in monopolies – that does the harm. Look at the oligarchs in Russia right now and how they control the country’s resources. You think those guys got there by producing the best goods and services to the people? Ha!

    I submit that it’s your opinion that’s ill-informed. Not only that, but it flies in the face of common sense. In your 1st paragraph you state “To survive in our system of monopolistic competition, they must grow, thereby eliminating the competition.” You completely miss the obvious – that companies who operate under competition must constantly be producing better goods and services for fear of losing profits to a firm with a better understanding of what consumers win. The firms fight it out and the consumer wins. Poor you, right? Even with a firm that had 100% market share, a free market would allow any number of competitors to come in and nibble away at it. Show me a firm that operated with 100% market share of an unsubstituable and desirable good – without government involvement – for any real period of time.

    “Big Oil, Big Pharma, Big Insurance, Big Box Retail and airlines are some examples.”
    Big Oil – like Standad Oil? Prices actually kept going down as Rockefeller tried to kill all his competition by undercutting everyone in price. Benefit -> consumer.
    Big Pharma – current incredibly onerous and expensive ‘prove it doesn’t hurt anyone’ regulation ensures very few can afford the hundreds of millions of dollars it takes to compete. This also keeps potentially life-saving cures away from those that want them for up to 20 years. Many needlessly die during that time.
    Big Box Retail – I’ve got a few Wal-Marts in town. Been there for 20 years. Still a lot of prosperous retailers with loyal clientel.
    Airlines – despite MANY airlines having gone bust over the years, there is a case here. It’s when domestics are – by regulation – the only ones allowed to compete for flights directly between 2 of the country’s cities. This drastically increases the price consumers have to pay. Thanks again, big brother.

    When I talk of the elite, I speak of those who got their wealth and power through uncompetative means. I have no problem with the Buffetts, Gates, and Googles out there that consistently made the right decisions – without government suppressing their competition – and made a lot of money serving the public with their offerings, be it an investment vehicle, software, or web browser. So, I would not call Buffett and Gates ‘elite’. Russian oligarchs, by contrast, would be considered elite in this sense. Note that my definition is different that just being at the top of your game, such as an athlete.

    “are you not doing the same thing when you denigrate the study of economics?”
    Have you actually worked as a mainstream economist? Do you know what sort of drastic assumptions they maintain when they model? You seem to be under the assumption that math, empirical testing, stats, and the other modern tools have a relevant place in economics. Sorry, but they don’t. Natural sciences, yes; social sciences, no. Just because you can quantify something, doesn’t mean you can use tools made for an entirely different machine. Humans make decisions based on needs that are constantly changing. There’s no natural law that states that you can average those needs and that those needs will come back to that point at anytime in the future. Current economics makes such assumptions in their statistical models, and such. Mainstream econ doesn’t even factor in personal debt (which became obvious how much it matters with the housing collapse) and the fact that production takes place in stages and over years. No, mainstream econ is painfully lacking in some areas and is overemphasized in others.

    Social sciences don’t necessarily progress the way natural sciences do. Otherwise, no one should have questioned Freud’s idea that male misbehaviour is guided by some sort of competition with his father for the mother. No, we would instead be still building upon that idea. Psychology and economics both have human behaviour at their core – something that doesn’t follow the laws found in the natural sciences.

    I get the impression that you think “Well, if all the top talent can’t get it right, then the system is inherently flawed and we need gov to step in and save the day!” This is a straw-man since the top-talent are of just one or two schools of economic thought. There are several others that include nobel prize winners and who’s members have done a much better job predicting and explaining the debacles that have kept occuring. But they don’t get the same voice since gov doesn’t get to spend and get more powerful under their prescription.

    “Trust me, you don’t want to do away with the Fed, the Sec and the FDIC. You want them to do their jobs!”
    Fed – was set up in 1913 to stop recessions and increase prosperity. Instead, the worst recessions have been on their watch and our currency is worth 4% of what it was since they came to power.
    SEC – you mean when all their employees are kissing Madoff’s butt and playing video games and watching porn? Thinking the SEC has got your back means you lower your defences and then another Madoff comes along.
    FDIC – all they do is create moral hazzard. Financial institutions can – and do – take extra risks as they know the taxpayer will bail them out. Sure, it’s nice to know there is ‘insurance’ covering your deposits, but it is the taxpayer, not the one affected, that is on the hook. FDIC wouldn’t be necessary under 100% reserves. If you want to argue the 100% reserves, please do some real research first, not from your Money and Banking textbook, but De Soto or Rothbard.

    “We do not have a free-enterprise system, DM… we haven’t had since the 1930s that you seem to think were so wonderful. My God, man! That was the decade of the Great Depression!”
    Where did I state that the Great Depression was great? And don’t go implying that everything is binary – there are in betweens. The few decades after WW2 was a period of much genuine prosperity. So was much of the 1800s (batteries, telephone, reaper, dishwasher, photography, electric lightbulb, escelator, zipper, radio, record player, blue jeans, toilet paper, typewriter, vaccuum cleaner, x-rays, modern lock & key, and much more).

    Again, we both want a better world for all and are pissed off on what we see out there. We differ, however, on the way to bring it about. From my perspective, it is government that goes to war, government that masacures its own people, government that allows companies to be free of competition, government that tries to save the day but screws things up even worse, government that forces me to relinquish 1/3 of my fairly earned income under threat of prison, government that funnels vast resources to a war on drugs (that has had the same results as alcohol prohibition) that slaps permanent records on minority young people … and the list goes on and on.

  8. It’s okay to disagree, DM, but comparing me to two of history’s greatest villains, both dictators, one a fascist and one a communist, is not only unfair, it’s iniquitous. Doing so has earned you no argument points with me nor, I trust, with my readers. However, I do have to admit to a certain admiration for the reasoned conclusions of Professor Chomsky and the activism of Ms. Klien. Both are intellectuals who have at least added to the great debate between left and right, while you and your kin are adding nothing but enmity. I assume that you are part of the Tea Party Movement.

    Russia? What’s Russia got to do with anything? This is a Red Herring, DM. What has developed out of the demise of the old Soviet Union has no bearing on the current progressive movement here in the United States.

    I too believe in competition. But when industries become so concentrated that they are “too big to fail,” as our government and the Fed have allowed them to become in recent years, then it’s time for a change — big change. A large part of this just passed the Senate and, after reconciliation with a similar bill passed earlier in the House, should be on the president’s desk by the Fourth of July. But then, I assume you agree with the majority of Republicans in Congress that this is “over-reach” by those damn tax-and-spend Democrats.

    Robert Mundel, Arthur Laffer and Milton Friedman eloquently argued the case for supply-side, free-trade economics and sucked the whole country in with Ronald Reagan ‘s landslide victory in 1980 over the beleaguered president, Jimmy Carter. But the likes of them are history now. You don’t like the conclusions of today’s mainstream economists, so; with no champion of your own left to defend the political right, you and your kin denigrate the whole body of thought. Gee, that makes a lot sense.

    Alan Greenspan, also a libertarian, free-trader, had his day but has admitted to Congress that he was wrong about deregulation of the financials. Indeed, John Maynard Keynes got it right when he said. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” So, whether you are right or whether you are wrong, you lose. Americans, at least a small majority them, have regained their senses. I suggest that you get used to the change.

    With this, I believe that I’ve given enough time and space on my blog for your rantings.

  9. I really enjoyed reading this blog.

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