As we near the so-called fiscal cliff at which time, among other things, the Bush tax cuts (which benefitted everyone, basically) are close to an end. They would be replaced by the Clinton tax rates which preceded them. All the attention has been on the fact that the highest Clinton rates (up to 39%) would result in more taxes on high income earners. There has been little discussion of how more taxpayers on the lower end would have to pay higher taxes. Personally, I welcome the return of the Clinton rates. A few extra points is not too much to pay in order to broaden the base of taxation. The more citizens who pay taxes, the more interested they will be in fiscal policy.
Of late, however, many on the left have expressed a substantial interest in MUCH higher taxes on top earners. More than a few modern liberals have spoken with affection of the times when marginal tax rates of 90% or higher enforced a greater degree of equality. At the same time, they note that the U.S. experienced economic expansions during periods when we had very high rates.
First, I will deal with the latter point. Has the U.S. had good economies during times of high tax rates? Certainly. It is possible to have good economies and high tax rates because people find ways to defeat the confiscatory impact of high taxes. For example, today’s corporate exec may get a very high salary and join an exclusive private club. Such an exec in a high tax regime may work for a company that builds its own golf course which the execs may enjoy for a very low fee. In addition, the company may invest in all kinds of perks related to the headquarters building and other benefits. Many of the rich benefits we are losing now are relics of a time when people sought to blunt the impact of income taxes by having companies provide non-cash rewards. There were other ways to defeat confiscation. Tax credits for speculative investments, various tax shelters, obscure loopholes in the code. Though marginal rates have sometimes been radically different, the actual take from the rates has been more steady. People will only pay so much before they will start to work hard NOT to pay more. The key in tax policy is to find a rate which people will pay without working too hard to avoid taxes. Such a policy is more efficient because it should bring in more money and not waste human energy in schemes to dodge payment.
The bigger issue, here, though, is the attitude exemplified by viewing a 90% top marginal rate with favor. I think the best way to get at these things is by asking basic questions. Why should those who earn more pay a much higher rate than others? After all, a man who makes 100,000 dollars will pay 10,000 dollars at a ten percent rate while a man who only makes 10,000 dollars will only pay 1,000 dollars. Such a principle would treat the two men as equals and yet would still make the wealthier man pay more. Why do we want to create a special higher rate for the person who makes more money? What justifies us in this plan of action? Rousseau (never thought of as a conservative) argued for a principle of law in which all laws must apply to all people equally. Otherwise, it would always be in the interest of a majority to target a minority for confiscation or other advantage-making.
The main answer that comes back is that if the government has additional needs, it is better to look to the rich to make up the difference than to ask others to pay. There is an immediate problem with that perspective in the sense that we probably honor notions of equality and citizenship better by asking rich and poor to pay an equal percentage of all costs if not an equal amount. It may be a greater problem still to encourage part of the population to look another part of the population as a national resource of some kind, which can be exploited as needed.
A pragmatist will shun these notions of principle and favor the expediency of taxing the wealthy at higher levels. It is true that they will feel less impact from higher rates, up to a point. The problem (setting principle aside, which is dangerous) is that the appetite for asymmetric taxation will only grow. Note England with its 50% rate on millionaires. What have they achieved other than a sense of satisfaction? Fewer millionaires. Rich people are mobile. Are you going to lock them up so you can tax them? France is ready to undergo a similar experiment with its 75% top rate.
The question of locking people up so you can tax them takes us back to the arena of principle. Do we think we own the rich? Or would it be better to encourage the sense that we truly are all in this thing together and that the decisions of all will affect all?