Tagged: economics

Wealth Creators

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.

Mitt Romney’s “Trust Me” Campaign

The breathtaking mendacity of the Romney campaign should come as a surprise to no one; the 2012 election cycle has been one rich with casual deceit and a devoutly perfidious stripe of chutzpah. Our own President has disgorged his share of half-truths and flat-out whoppers during this past year, even earning PolitiFact’s not-quite-coveted “Pants on Fire!” rating for some more transparently false claims about his opponent.

Perhaps it is the sheer quantity and brazenness of Governor Romney’s untruths that is so shocking to his critics: his long-since-discredited claim about President Obama’s fictional “apology tour”, vigorously and repeatedly belabored, has done little to enhance the Governor’s image as a truthful and trustworthy candidate.

Indeed, trust seems to have become a central concept to the Romney campaign: the Governor now asks voters to consider him not on the basis of data or reason but owing only to their capacity to visualize him as an occupant of the Oval Office. Doesn’t he seem like a President? Go on– give him a chance. Trust him.

There is little beyond this narrow, visceral range of appeal to recommend Governor Romney to an informed voter. The centerpiece of the candidate’s supposed qualifications—his much-touted economic expertise—is a budget plan that, as a superabundance of nonpartisan studies have noted, will raise rather than lower the deficit. The Romney campaign, and the Governor himself, have taken to responding in frightfully vague fashion. Governor Romney will close the deficit while lowering taxes and raising defense spending—how? Just elect him. You’ll see. Trust him.

The IGM Economic Experts Panel, a nonpartisan survey of forty economists conducted each year by the University of Chicago’s Booth School of Business, found zero respondents willing to endorse tax cuts as a method of raising revenue. Around 90% credited the American Recovery and Reinvestment Act of 2009 as having successfully lowered unemployment, with similar ratios supporting the efficacy of the 2008 bank bailout and rejecting the idea that federal policies play a major role in gas prices.

All of this puts a major dent in Governor Romney’s already tremulous fiscal and economic case. But forget the specifics (as the candidate, when debating, seems so frequently to do). He is a businessman; he managed the Olympics. Trust him.

The candidate’s performance in the October 22nd foreign policy debate seemed to indicate that there is substantively very little to differentiate him from the President when it comes to the world at large. He clung so closely to the President’s actions and positions that, at times, his own presence was difficult to discern.

Where, precisely, is Governor Romney’s case for reelection? Where is the evidence that he will do a better job than the President? Where is the data? Where is the justification?

Never mind all that. Trust him.

-Mattathias Lerner