A Novel Idea–Tax The Rich

Making the rich pay higher taxes is an ancient notion that budget gaps can be filled by forcing a heavy levy on the 1% or 2%  most wealthy people in any developed nation.

Tim Geithner has called into question the programs under which George Bush cut taxes to the wealthy. The Treasury Secretary would like to see the tax laws that gave the rich a break  expire at the end of the year which Republicans want to extend. He claims that the Bush tax programs cost America an extraordinary amount of money that could have been collected by the IRS , but appears to have no data to back up his argument.

“Borrowing to finance tax cuts for the top 2 percent would be a $700 billion fiscal mistake. It’s not the prescription the economy needs now, and the country can’t afford it”, according to Reuters.

Geithner’s reasoning has a number of flaws, none of which puts any moral blame on the rich for being rich or for the rich paying low taxes because they have been allowed to. His first assertion is that if people who make less than $200,000 a year pay less in taxes that they will spend more. It would seem the same would be true of the well-to-do, but that is not part of his equation.

Another argument against Geithner’s thought process is that taxes on personal income, particularly as they rise above 50%, may be regressive. It is difficult to prove that case or to disprove it. But there is at least some chance that rich Americans will defer some of their income to avoid a tax burden and will not spend what they do not have. High taxes on the rich could backfire even if  egalitarianism is popular in an election year.

The Geithner proposal also ignores the fact that most rich people are smart, with the possible exception of those who inherited their money. And the wealthy get good tax advice. The prospect of higher taxes in 2011 will cause both wealthy individuals and profitable companies to move as much taxable income as they can into the fourth quarter of this year. That may improve GDP for the fourth quarter, but it could severely undermine economic activity in the first quarter of 2011.

Higher taxes on the rich make sense until the process turns out to hurt government receipts rather than helping them

Douglas A. McIntyre