Explain the debate over raising taxes for the rich.
December 3, 2012 3:50 PM   Subscribe

Please explain the debate over whether or not to raise taxes on the wealthiest Americans. I am apolitical. I have no horse in this race. My knee-jerk response is that making the rich pay more in taxes sounds like a good idea, but I am neither (a) rich, nor (b) an economist. What are the economic arguments for not taxing the wealthy at a rate higher than the current one? My best guess is that it might affect jobs, but I honestly have no idea.
posted by jackypaper to Law & Government (19 answers total) 19 users marked this as a favorite
Greed: Also a reason for taxing the wealthy more. Not sure it is one that really gets at the question, though.
posted by found missing at 3:54 PM on December 3, 2012

Mod note: More than one word answers considered helpful, thanks.
posted by jessamyn (staff) at 3:57 PM on December 3, 2012 [2 favorites]

Sorry, that was flip - I believe part of the problem has to do with confusion about exactly who is meant by "the wealthiest Americans" - people who don't quite fall into that upper echelon believe that they will be among those taxed, and don't like that.

There is also the argument that raising taxes on the rich alone will not do the job, and that all the talk about raising taxes on the rich is distracting us from the thing they believe will have a greater impact - cutting spending. In fact, if you cut spending and tinker with the tax code some more, they argue, you can fix the deficit without raising taxes in the first place.

There's an essay I found here that seems to present the argument against fairly exhaustively.

And to explain my "greed" comment - that was because this particular mindset was sounding like someone who argued that they could make more charitable donations if they didn't have as many taxes to pay, but I also note that when we do cut taxes the same people who say that often sink their money into things for themselves rather than make the charitable donations they promised.
posted by EmpressCallipygos at 3:59 PM on December 3, 2012 [6 favorites]

Wikipedia has an article about the Laffer curve which is sometimes brought up in these discussions. The Laffer curve is pretty theoretical and where the peak of the curve falls is disputed, but Wikipedia addresses some of this.
posted by Durin's Bane at 4:03 PM on December 3, 2012

For: Due to the current structure of the US tax code, higher earners effectively pay a lower tax rate than the middle class. That, and they can obviously afford to pay more better than any other group. Personally I'd rather see us go after the fortune 500s effectively paying no US taxes over the wealthy, but you'll never see either side go after their corporate sponsors.

Against: This has nothing to do with income, and everything to do with 60% of the federal budget going to social entitlement programs. Even all those "deductions" we keep hearing so much about really don't add up to a hill of beans. And FWIW, the military comes in third as a major category of the budget, so even the drastic cuts there won't have much effect on the overall budget.

At the risk of sounding somewhat harsh, the debate boils down to people who understand exponential growth vs people who do not.
posted by pla at 4:07 PM on December 3, 2012

Response by poster: ". . . the debate boils down to people who understand exponential growth vs people who do not."

I am one who does not.
posted by jackypaper at 4:12 PM on December 3, 2012 [1 favorite]

There are many aspects to this discussion. Here are some of them.

- US income taxes have traditionally been progressive but are now less so (income tax rates on the wealthy are lower now than in recent past decades).

- There's concern about uneven income distribution leading to increasing problems with concentration of power and influence among the wealthy, especially with our donation-driven election systems.

- There's the debate about whether the economy will grow from demand or investment. If you believe in demand-driven growth, then lower income earners need lower taxes to have more disposable income. They will spend extra income they have on goods and services, which stimulates the economy.

- There's the discussion about "carried interest" tax rates on certain high income people being downright unfair because the income is treated as capital gains instead of earned income.

- Warren Buffet, one of the very top wealthiest people in the US, believes he is taxed too low because of the lower tax rates on dividend and capital gains income vs. earned income and because of various loopholes available to the wealthy.

- Offshore tax shelters are a big issue as well.

- Some people advocate more sales tax and less income tax, but that hits poorer people much harder.

- Many wealthy people feel they worked hard to generate their income and shouldn't be penalized for their hard work. The "you didn't build that" counter argument is that they depend on all kinds of public services and programs (public education of employees and all kinds of public infrastructure) and those things need to be given back to by everyone who benefits from them.

- A nuace that should be noted is whether a discussion is about higher tax rates on all the income of wealthy individuals or just on the income they make above a certain amount (such as $200,000 or whatever).
posted by Dansaman at 4:20 PM on December 3, 2012 [8 favorites]

The primary argument is indeed that wealthy people will start fewer businesses, and/or invest less in their existing companies, leading to fewer jobs, if their personal income tax rate is too high.

An important factor in the opposition is that many Republican members of Congress have signed Grover Norquist's tax pledge and are therefore obligated to oppose all tax increases, even on the flimsiest of pretexts, to prevent Norquist from funding candidates running against them and potentially ousting them.

I believe that Norquist's pledge states specifically that the signer will oppose raising marginal income tax rates; IIRC, it says nothing about eliminating or phasing out deductions, closing loopholes, or beefing up other kinds of taxes (say, on long-term capital gains). Republicans are starting to talk about these alternatives.
posted by kindall at 4:22 PM on December 3, 2012

Text of the Norquist Pledge:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.
The tax on long-term capital gains is an income tax. It was reduced to 15% in 2003 as part of the Bush tax cuts. If one wanted to establish that cutting taxes on the wealthy would create jobs, this would be the tax to cut. Did we get a lot of jobs? No. In 1997, the top rate on long term capital gains was 28%. Did we have a lot of jobs in 1997? Yes.
posted by ambrosia at 4:34 PM on December 3, 2012

I'm not going to attempt to justify taxes in and of themselves - if we are talking about raising taxes then I think it's reasonable to assume that we agree that taxes are not immoral and are something that a government can ethically impose.

Just to get that out of the way.

There are lots of arguments in favor of raising taxes on the rich. One of them is that taxes have a lesser impact on the rich than they do on the rest of us. The marginal value of a dollar is much less for a wealthy person than for a poor or middle class person. They also save/invest much more of their money, so increased taxes won't actually change how they live their day to day lives.

Another point is that over the last 30 years, the share of the national income earned by the top 1% has grown mightily. In 1979 the top 1% earned 8.9% of the nation's before tax income (7.4% after tax). In 2009 it was 13.4% (11.5%). That's actually a five year low. In 2007 it was 18.7% (16.7%). These numbers are from the CBO.

Over the last 30 years the rich have done staggeringly well. Not only has the pie gotten bigger, but their share of it has increased. Most of those gains have come at the expense of the poor, who have seen their share of the pie shrink. The middle class has worked very hard to stay put.

That's why we should tax the rich more.
posted by It's Never Lurgi at 5:39 PM on December 3, 2012 [1 favorite]

Best answer: The primary taxes being argued at this time are federal income tax, capital gains tax, and FICA/payroll taxes for Social Security.

The argument over federal income tax is whether the top brackets consisting of about 2% of the highest earning taxpayers should pay a higher rate on the top end of their income. This rate will not impact their income until it reaches a certain level. In 2011, the top 35% tax bracket started at $379,150. If the top bracket were the only one to be increased, the first $379,150 would be taxed the same as before whether someone made $500,000 or $50,000,000. The issue is that the latter would see a significant increase in the absolute dollar amount taken in taxes. Meanwhile, the top tax rate for long term capital gains is at 15%. Many of the wealthiest investors such as Buffett and Romney are taxed almost entirely by this measure as their income is not standard employment income but rather returns on investments. If capital gains taxes were treated as ordinary income, these investors would be immediately paying far more in taxes.

The anti-tax advocates argue that by taxing the wealthy, the government reduces the amount of money available to invest in businesses, goods, and employment. They also argue that increasing the capital gains tax creates a disincentive to invest money. Depending on the viewpoint, this argument either leads to a suggestion that government revenues should not increase as government spending must be put in check or a suggestion that increased investment and economic activity leads to more income in general thus a larger tax base. This larger tax base would mean that a lower percentage of a higher amount adds up to more revenues than a higher percentage of a smaller amount.

Pro-tax advocates such as Buffett suggest that higher tax rates are not a significant disincentive. As Buffett said himself, sitting on cash is a guaranteed way to lose money to inflation, so investment of wealth is a given. With higher revenues, some pro-tax advocates suggest that these can fund social programs which in turn reduce waste expenditures such as prisons, health care inefficiencies, and promote better skills for better employment. Others take the approach that with government spending cuts combined with higher taxes will reduce deficits and potentially reach surplus to reduce the national debt.

Between 1936 and 1981, the top tax bracket in the United States was over 70%, yet there were still plenty of capital investments spurring growth. However, globalization has made it easier for citizens of other countries to invest and conduct business in the United States. Eduardo Saverin of Facebook is a major example of a particularly wealthy investor who left American citizenship in favor of the lower tax rates of Singapore. However, there are more than a few reasons not to relinquish American citizenship over taxes alone.

American government expenditures are not pegged to revenues as proven by the deficit spending through the Reagan administration and the budget surplus attained during the Clinton administration with tax rates higher than years past. However, there is a limit on how much deficit spending can be done, both through the "debt ceiling" which limits how much debt the government can incur in a budget without a legislative action and through economics which demand that a country's debt remain within a certain ratio of GDP. If the debt goes too far overboard, a country can have a difficult time repaying obligations and we wind up with a situation similar to what Greece and Argentina have faced relatively recently.

As for Social Security taxes, those currently stand at 4.2% of wages plus a 6.2% contribution from employers. Without an extension, that rate will rise to 6.2% for both employee and employer. This tax is levied only on income up to $110,100 in 2012. Because of that, the total Social Security tax paid by someone earning $110,100 is the highest possible rate, as the exact same amount will be levied on anyone making more.

The Republican argument is that the tax rate needs to return to 6.2% in order to fund Social Security even with cuts to the program. They generally oppose increasing the cap on tax rates as the retirement benefits paid out by Social Security are determined in part by the amount that a person contributed in taxes over their lifetime. Meanwhile, Obama pushed for a reduction in the Social Security tax rate as a part of fiscal stimulus as it would lighten the tax burden on all taxpayers and give incentive for consumer spending rather than relying upon investment from the top.

That's at least a quick rundown of the tax argument to the best of my knowledge. I didn't touch upon state income taxes, sales taxes, property taxes, or proposals for alternate tax structures. At this point in time, the only realistic debates are whether the top marginal tax brackets will increase, how much of an increase will be at stake, whether capital gains taxes will be altered, and whether the Social Security tax reduction will remain intact. The latter of those is the only one that will have a direct impact on how much in tax most Americans will pay.
posted by Saydur at 6:09 PM on December 3, 2012 [11 favorites]

I wrote elsewhere on the site:
"Shifting the burden to the rich [i.e. raising taxes on the rich, only, vs on everyone; or, alternately, getting rid of tax cuts for the rich, instead of getting rid of everyone's tax cut] will make the government's haul less of a drag on the economy. This is because of the notion of marginal utility: If the broke-ass guy at the bar next to me sees a ten-spot on the ground, he spends it. If my rich uncle even bothers to pick it up, it goes in his pocket, forgotten. In other words, the dollar to the poor man has much greater utility than it does to the rich man - back to the guy at the bar, he spends it on beer, and the bartender takes that extra tip and puts it in the stripper's thong, and she pays the babysitter, and the babysitter buys gas. Churn, baby - the GDP's just gone up by five bucks. The rich uncle's extra money sits in a bank, which may or may not lend it out. That dollar is maybe two, to the GDP.

The best way to apportion taxes is that which removes the least utility from the market. Tax the rich guy (and most definitely tax capital gains, which are money made by doing nothing), not the poor guy, to maximize the economy."
posted by notsnot at 8:16 PM on December 3, 2012 [2 favorites]

It doesn't matter. Higher income folks spend most of their money on assets. The rest of us spend most of our money on goods, and buy assets on credit. The interest on the credit items go to the wealthier among us. This tendency wouldn't be too troublesome, except that the wealthy tend to get wealthier because of this process, but the rest of us don't (tend to get wealthier as a result of the process). Goods tend to fluctuate according to the golden laws of supply and demand--oversupply lowers the price and vice versa. Assets don't follow the production/demand cycle in quite the same way, because they get more expensive as the demand/production grows. The image of an ever-expanding balloon is apt. Sooner or later it pops, and an adjustment is required.

Wealthy people (buying assets) don't put money back into the system the same way consumers (spending wages when) buying goods put money back into the system: wage--> food--> grower-->store....and so on. Assets are set aside for sale later on, when their value increases. Think for a moment about who spends what portion of their money on assets, compared to what they spend on goods. The wage earner buys assets on credit (house, for example). The wealthy invests in homes and boats, too, but they don't deal with credit the same way the rest of us to, because profits are invested in assets, if you see what I'm trying to get at.

This is a pretty simple explanation. You can make a couple graphs to see how it plays out. Anyhow, the notion behind a graduated tax is supposed to be equity. You pay for what you get. You get what you pay for. Something like that. I like the idea of making rich people pay a lot of tax, but I can't figure out how to defend the notion in an honest argument.

More to the point is how to modify capitalism (which is an excellent machine for generating wealth, for the middle classes as well as the wealthy), so that it doesn't require the exploitation of the rest of us to support galactic bank accounts for those at the top of the pyramid. One way would be to, somehow, remove the credit servicing industry from the cycle. It works like a sort of cosmic osmosis, pulling a trillion or so dollars upward (in the USA alone), but allows only a few hundred billions of that money to trickle back downward. The driving engine for this inequity is credit. Credit isn't evil, but it is a dangerous tool. Credit like this happens only because wages are linked to goods, not assets. We don't receive commensurate wage raises because if we did, we wouldn't need credit to buy assets. You can see the way Catch 22 begins to come into play here.

This is where the revolutionary meets Big Brother.

Never mind. My opiate is a wailin' song and a good guitar. I am not a danger to the system.

[no more edits. take the typos with a quarter-grain of your favorite smile inducing product and move on.]
posted by mule98J at 11:42 PM on December 3, 2012 [1 favorite]

Not an answer to your question, but a pointer. A pointer to a recent episode of the Intelligence Squared podcast (NPR) that covered this exact issue.

It's an Oxford-style debate with interesting and appropriate guests/debaters.

I recommend reading the page at the first link and seeing if it's something you'll enjoy. If it helps, I'm not especially interested in debating but find Oxford-style debates inherently captivating… you may too.
posted by fakelvis at 2:19 AM on December 4, 2012

The Laffer curve is pretty theoretical and where the peak of the curve falls is disputed...

I think it's more accurate to say that the Laffer curve is wild-ass speculation on the part of some supply-siders and that the peak of the curve is in dispute because there has never been a case where simply lowering taxes resulted in increased revenue.
posted by she's not there at 2:41 AM on December 4, 2012

The economic arguments for not taxing the wealthy are unconvincing. The general idea is that the wealthy are "job-creators", an assumption that has little grounding in fact.

The economic arguments for taxing the wealthy are that the wealthy generally pay less in taxes due to a broken tax code that taxes income at a higher rate than capital gains, thus placing a disproportionate burden on middle-income citizens. This leads into a moral argument which is rarely stated but often conveyed as subtext, that the rest of us are financing the wealthy - and not just any wealthy people, but primarily the most contemptible kind: those who inherited money and subsist on those investments without working.

The rebuttal to this moral argument is another subtexted moral argument, that there are plenty of self-made millionaires who fall into this category as well, and that raising taxes on the wealthy will not actually lead to benefits for the average citizen. Countless examples can be made of overpaid and underqualified public servants who made grotesque salaries based on their track record and qualifications, so this second argument is not without basis in fact.

Ultimately, I believe in raising the capital gains tax as well as imposing a steep tax on luxury goods. (Effectively taxing the wealthy more.) Then again, I'm a moral relativist so I'm more about questions like "What works?" rather than "What would be fair?"
posted by wolfdreams01 at 8:10 AM on December 4, 2012

Mod note: Folks, please do not debate this topic, please just answer the OPs question and take debate-level argument about this to MeMail or elsewhere. Thank you.
posted by jessamyn (staff) at 8:57 AM on December 4, 2012

>The general idea is that the wealthy are "job-creators", an assumption that has little grounding in fact.

There are several different ways that they are, in theory:

1. They sometimes will create new businesses or expand old ones. Sure they do, sometimes.

2. They spend their money and that creates work. Many craftsmen and tradesmen will admit that they are not normally hired by poor people.

3. They invest - in stocks, in building projects, etc. - and that creates work as well.

So the answer, as it so often is, is that it is sometimes true and sometimes not.
posted by yclipse at 9:27 AM on December 4, 2012

Thanks for the correction on the Norquist pledge, ambrosia. It appears that many Republicans are now willing to risk bending the pledge, or find workarounds, anyway. These are more afraid of the voters than of Norquist at this point, which is as it should be.

To my mind, the big problem with the capital gains tax is not that gains are not taxed at the same rate as regular income, but that the capital gains tax is not progressive. There are exclusions for some kinds of capital gains that do benefit the non-wealthy (such as the allowance for capital gains on your house) but in all, the capital gains tax is regressive. I'm fine with it being lower than regular income tax for most folks, but the more you make, the closer it should approach your regular tax rate.
posted by kindall at 10:45 AM on December 4, 2012

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