Last week in the New York Times, economist Paul Krugman called for higher taxes than the Clinton era, citing how increased revenues need to be in the picture and not just spending cuts.
The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts?
Some conservatives would respond by saying the outlook has darkened because of spending. Intuitively increased revenue would just encourage inefficient government. But let’s give Krugman the benefit of the doubt by accepting his point that a combination of increased revenue and lower expenditure will yield a more expedient strategy to lower the deficit.
Krugman suggests raising taxes on high-incomes in particular, and raising them “in earnest,” refusing any claim that it would not be enough to matter.
The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.
For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit.
One must be suspicious of Krugman’s choice of words. Particularly him deciding to say “before 1980,” did he mean to refer to the 1970’s? Heartland Senior Fellow for Entitlement and Budget Policy Peter Ferrara once publicly said on Thom Hartmann’s radio program, “Any one who wants to go back to the 1970’s needs to have their head checked.” Krugman trying to disguise his dubious evidence to support his claim is a moot point because his conclusion is inherently over- optimistic for one simple reason: The more you raise taxes on high-income earners, the more money they will put in non-taxable assets.
Thomas Sowell of the Hoover Institution explains:
High tax rates drive investors into tax shelters like tax-exempt bonds or drive their investments out of the country altogether, costing Americans jobs. This is not rocket science– and the data are there to prove it. But somebody has to say it.
If Krugman wants to achieve higher revenue then he should not look to outdo the Clinton-strategy, but rather should look to outdo the strategies of Coolidge, Kennedy, Reagan, and Bush. Yes, tax cuts for high-incomes. Sowell states:
What are called “tax cuts for the rich” have been reductions in high tax rates under four different administrations, including the Democratic administration of John F. Kennedy. In each case, going all the way back to the 1920s, the reduced tax rates have led to increased tax revenues for the government.
Sowell goes on to make the claim that this evidence is understated by Republicans. Which may be why liberals like Krugman feel they do not need to address the important historical evidence that nullifies his op-ed and subsequently why sadly, people still hold the “tax the rich” argument with strong sentiment.
As we all know, Occupy Wall Street is a powerful example of strong “tax the rich” sentiment. Despite that, the movement lacks a specific amount that they want to tax the rich, the answers just always seems to be “more.”
Why Wall Street?
If one were to regard “Wall Street” as any one and every one that works in finance, then sure; the argument can be made that Wall Street did play a role in the financial crisis. But their role has very little to do with income disparity, which appears to be the movement’s central theme. Amongst the “Top 1%” Occupy Wall Street protests against only 14% of them are in careers related to finance at all.
But just protesting Wall Street for the financial crisis is also ignoring poor monetary policy by the Fed, predatory mortgage lending by Fannie Mae and Freddie Mac, governments over-spending on entitlement programs, and failed regulations intent on market transparency.
What I mean by those failed regulations were those that were responsible for forcing banks to write down the open market value of their entire mortgage portfolios, the good and the bad, regardless if they were even salable at that moment on their balance sheet. This forced banks to guess the value of complex instruments in a pessimistic and volatile market, encouraging undervaluation leading to maniacal short-selling of bank stocks by hedge funds. This almost single-handedly caused the value of financial stocks to plummet (more on the mark-to-market rule from Slate).
So even regulators, including the SEC, the Fed, The Treasury Department, and the Comptroller of Currency played a role in the financial crisis by enforcing this obscure accounting rule. One can imagine this sort of flies in the face of Naomi Klein – always known for an overzealous statement or two – that the crash on Wall Street should be for (Milton) Friedmanism what the fall of the Berlin Wall was for communism.
So what does this all say about the Occupy Wall Street movement wanting to blame everything on Wall Street and ignore everything else? Well it would seem obvious that blaming Wall Street fits in so well with many other pre-existing agendas, including progressive taxation, increased social welfare, anti-globalization, and anti-corporatism.
Where it comes from
A deep underlying factor for the strong sentiment to tax the rich more and more in my opinion was revealed in the 1993 French film, Germinal. A film which tells the story of a coalminer’s town in northern France whom, under the leadership of a young, naïve socialist named Étienne organizes a strike against the rich owners after they implemented a controversial new pay schedule for the miners.
In this scene, Étienne, is discussing the revolution and his egalitarian views with a fellow miner when overheard by Souvarine, a Russian extremist who is quick to critique the sincerity of his noble views. Reading from a newspaper, Souvarine narrates the story of two shop workers who won the lottery, and instead of sharing their wealth with their fellow men are investing in bonds in an attempt to further improve their fortune and never work again. Souvaine then makes one poignant critique of Étienne and the revolutionaries, “you hate the rich only because you wish you were in their place.”
Souvarine was no capitalist; in fact, he hated it as much as Étienne, yet his critique can still be accurately made toward many “tax the rich” advocates today. Many of whom denounce greed but then ironically advocate programs that are inherently greedy; after all, greed means taking too much which one does not rightfully deserve.
But instead of a Russian-style violent overthrow of the government and a rebuilding of society from the bottom up as Souvarine suggests. Activists who seek to rid society of greed should look at government as the problem and capitalism as the solution, not the other way around as Professor Coyne of George Mason University elaborates on in this video released last Monday for LearnLiberty.org, a project of the Institute for Humane Studies.
Based on the information pointed out, those who blame capitalism for promoting greed have a false understanding of capitalism. No other system allows a man to take something from another man without a mutual agreement. Any transaction that goes otherwise is one intervened from the government. For greed to be extinguished in society, society must first extinguish government invention in the market.