Increasing Taxes on the Wealthy is Unfair?

Matthew Yglesias via Brad DeLong:

Have We Won the Empirical Debate About Economic Policy, by Brad DeLong: Matthew Yglesias:

Yglesias » Pity For The Rich: You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. And of course Representative Paul Ryan is both a fan of Books and a fan of the works of Ayn Rand. Which is just to say that we used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.

Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare.

If that sounds remotely plausible to you, you might have a lucrative career ahead of you working as an apologist for said Galtian Overlords. If not, then congratulations for possessing a modicum of common sense.

The immorality is based upon the idea that the wealthy earned every penny they received and it would be immoral to take it away and give it to those who didn’t toil as hard, as effectively, or at all (you know, the people whose wages have not kept up with their productivity). The arguments against the idea that pay at the top reflects merit alone are well known — the contention hardly passes the laugh test — and I won’t repeat them here. But anyone who thinks the reward for crashing the financial sector ought to be unimaginable wealth should rethink their ideas.

Let me focus instead on the opening paragraph:

The Ryan plan is based on three premises. First, our economy is headed for a predictable disaster because of the ruinous levels of government spending. (Standard & Poors’ decision this week to downgrade its outlook for U.S. debt only confirms this worry.) Second, we already have one of the highest corporate tax rates in the world, and we can’t load more income taxes onto entrepreneurs without expecting collateral harm to jobs and economic growth. Third, therefore, we must cut spending and reform entitlements, and this would necessarily affect the nearly 70 percent of Americans who take more from the government than they pay in taxes.

On the first point, it’s debt, not spending, that is at issue. You can have high spending with little debt if you are wiling to collect the taxes to support it. In addition, the problem is mainly rising health costs, not spending in general — so that’s what we ought to be talking about. We shouldn’t let deception over where the true problem is lead us to solutions that meet the ideological goal of Brooks and others of smaller government, but do little to help solve the main problem.

On the second and third points, the third follows from the second, but the evidence for the second proposition is shaky at best even given the narrow way it is stated (income taxes on entrepreneurs as opposed to taxes more generally). We can raise taxes on the wealthy without harming economic growth, particularly since we are taxing away income that was earned on some basis other than merit (and even if we do buy into the claim that it is all merit, would you work substantially less if the reward this year was only $16 million rather than $20 million?). There is no solid empirical evidence that suggests that changes in taxes at the rates we are considering would have any meaningful effect on economic growth and employment. Thus, it is not true that our only choice is to cut spending — the cuts would be too large to be tolerable anyway — tax increases must also be part of the solution.

We’ve heard versions of these arguments before. But the only thing that seems to trickle down after tax cuts at the top is the hole in the budget they bring about, and the desire to pay for those cuts through cuts to programs that provide important benefits to middle and lower income households.

Update: Paul Krugman has a slightly different take on this:

On Pity for the Rich, by Paul Krugman: Matt Yglesias has a good question, but I don’t think that I agree with his answer. He points out that

we used to have a debate in which the left said redistributive taxation might be a good idea nd then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.
but that now the right seems fixated on the point that taxing the rich is unfair — they made it, they should keep it.

And he suggests that the right is, implicitly, conceding that trickle-down economics doesn’t work.

But my take is that what we’re looking at is the closing of the conservative intellectual universe, the creation of an echo chamber in which rightists talk only to each other, and in which even the pretense of caring about ordinary people is disappearing. I mean, we’ve been living for some time in an environment in which the WSJ can refer, unselfconsciously, to people making too little to pay income taxes as “lucky duckies”; where Chicago professors making several hundred thousand a year whine that they can’t afford any more taxes, and are surprised when that rubs some people the wrong way. Why wouldn’t such people find it completely natural to think that the hurt feelings of the rich are the main consideration in economic policy?

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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