As the President and House Speaker John Boehner try and repeatedly fail to come to an agreement regarding the so-called “fiscal cliff”, a dependable and predictable sticking point has been the mystifyingly overinflated issue of taxing the rich. The President is bizarrely fixated on ensuring that America’s wealthiest pay what is incessantly referred to as “their fair share”. Boehner and the Republicans have long been risibly fanatical in their insistence that the rich pay as little as possible.
This debate might sensibly be called meretricious if not for the fact that the public is bored and unconvinced by such pompous tomfoolery. Rarely has an argument with so little value so thoroughly sabotaged the machinery of government.
There is more than a little truth to the claim that, if taxed too extravagantly, America’s rich will flee to greener, less rapacious pastures. This month, the French film star Gerard Depardieu became an official resident of Néchine, Belgium, apparently in flight from the 75% tax rate imposed on France’s wealthiest citizens at the insistence of President Francois Hollande. In Belgium, where the individual tax rate tops out at 50%, Depardieu joins the sizable segment of Gaul’s exiled patrician class who have refused to contribute the bulk of their personal revenues to their nation’s depleted coffers.
Nations are not and cannot be in the business of chasing citizens from their shores by means of economic harassment. It must be noted and accepted that it is, in fact, possible to tax the rich at too high a rate.
In America, however, where the denizens of mansions and luxury high-rises rarely pay even 35% in personal income taxes, this point is likely moot. Those in favor of a low tax rate on the rich have argued insipidly for thirty years that the wealthy are not so much wealth possessors as “wealth creators”. This is a claim that bears scrutiny.
There are two possible ways that high earners might “create wealth”. The first is by employing others or by facilitating their employment through investment in productive enterprise; the second is through expenditure and consumption that stimulate the economy and cultivate employment. This second point is easily dismissed. Spending by the highest-earning quintile of taxpayers in 2011 totaled 38% of aggregate private expenditures; even if these high earners reduced their expenditures by precisely the amount of a hypothetical increase in their taxes, the effect on employment would be less than negligible.
The half of American private-sector workers who are not employed by small business would be unlikely to be affected by a rise in the personal expenses of their managers. Executives at public corporations would be unable to lay off workers to maximize their own salaries, since their pay is controlled by boards of directors that are themselves answerable to shareholders.
Clearly, then, the potential impact of tax increases on employment is restricted to those small businesses owned by high earners. A 2011 Treasury study found that only about a quarter of America’s small businesses are owned by those making more than $200,000 a year. So the people who might potentially be affected by an increase in the individual tax rates of their employers constitute about 12.5% of all private-sector workers.
This is a not-insubstantial segment of the population, and, while such encompassing venality seems seriously unlikely, there can be no guarantee that America’s small business owners are not so greedy as to lay off workers rather than suffer a pay cut. In fact, it would be perfectly rational for them to do so. As usual, the question is whether there is more to be gained by raising taxes on these earners then there is to be lost.
In a vacuum, there is clearly much more to be lost by raising tax rates on the wealthy: the miniscule gain in revenue to be squeezed from these earners will do almost nothing to close the deficit, and in most other respects is similarly paltry. One expects that the President has embraced the “fair share” notion as a rhetorical utility, a way of initiating a larger conversation about taxation. Such a conversation is deeply necessary: from broadening the tax base, to simplifying the tax code, to eliminating deductions and loopholes, to introducing novel new taxes and eliminating useless old ones, taxation deserves a serious dialogue of its own—as opposed to its current status as a blunt instrument with which to bludgeon the ideological opposition.
In any case, both the President and his Republican opposition have been thoroughly irresponsible in approaching taxation as an issue of purely ideological importance. “Wealth creators” deserve to be neither coddled nor demonized; they are part of the conversation, too.