Weekly Standard Online
September 24, 2011
by Irwin Stelzer
Willie Sutton separated over 100 banks from $2 million before he was finally incarcerated in 1952. When asked why he robbed banks, he is said to have responded, "Because that's where the money is." Apparently, politicians around the world now want to tax the rich, because they believe, or say they do, that's where the money is. They're wrong. The simple fact is that there aren't enough of the "millionaires and billionaires" who are now the target of President Barack Obama's campaign trail scorn to make the tiniest dent in America's deficit. Or in the deficits of other countries that are trying to squeeze the rich.
Politicians in Italy are calling for a wealth tax, and their counterparts in France, Greece, Spain, Portugal, Japan, and Great Britain are pushing a variety of ways to get at the wallets of the rich who, it must be conceded, in several countries are more famous for tax evasion—which goes far beyond legal avoidance—than for tax compliance.
Conservative politicians complain that these measures won't yield significant revenues from millionaires and billionaires, and will discourage investment and risk-taking. To conservatives, the tax structure is a means of generating revenue in a way that encourages, or at least does not unduly discourage, efficient investment. Not to President Obama and his international counterparts on the left. To them, the guiding principle is fairness, a rather elastic concept, but one that plays well on the campaign trail. It incorporates the ideas that those who benefit most from the economy should pay the most (which they already do), and that in a period of austerity everyone should share the pain of bringing deficits down (something no one denies). And an emphasis on fairness gives an open field to those who see taxation as a means of redistributing income from high earners to those in need of public assistance. These opposing views of what tax systems are supposed to do can be reconciled only by an exquisite balancing of the demands for an efficient use of the tax system and society's notion of what is fair—and exquisite balancing is not in long supply in Washington these days.
The practical question is whether politicians following the Willy Sutton approach are likely to achieve their goal of cutting the deficit. In America, at least, they won't. For one thing, their American idol, billionaire investor Warren Buffett, is simply wrong when he generalizes from his own experience of having a lower effective tax rate than his secretary, and wrong again when he says a change in tax policy is necessary to level the field: He and other billionaires who want to pay more are free to mail their checks to the Treasury in whatever amount does not put too great a strain on their petty cash boxes.
"Facts are stubborn things," said founding father John Adams in 1770, "and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence." Obama justifies his proposed tax increases by reference to Buffett and his secretary, who presumably consented of her own free will to having her tax rate published by her boss. The president says that "people making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay." When in full flow, he adds, "That's not class warfare. That's math."
To imply that million dollar earners pay lower rates than middle class earners is to ignore a stubborn fact: they don't. People earning more than $1 million are subject to an effective tax rate of 28.9 percent of their income (total federal taxes, including income taxes, payroll taxes and other taxes), while households making between $50,000 and $75,000 face an average rate of 20 percent, according to data from Tax Policy Center. There are good arguments for treating capital gains, now taxed at a lower rate than income, at the higher income tax rate; for removing special benefits accorded hedge fund operators; and for eliminating lots of features that benefit high earners. But doing so because of a belief that "the rich" are subject to a lower tax rate than the middle class is not one of them.
Conservatives have their own view of the social goals of tax policy. They are troubled by the stubborn facts that almost half of all households pay no income tax and almost 28 percent pay neither income tax nor payroll tax. This makes a large number of voters unconcerned about soaring government spending, and creates a cheering section for increases in benefits.
The amounts that would be raised by the president's proposals from "millionaires and billionaires" might come to the rounding error in the national accounts. The major impact would be on individuals earning more than $200,000 annually and families earning more than $250,000. This group accounts for 3 percent of all tax filers, earns 30 percent of all income, and already pays 52 percent of all income taxes. Most important, 65 percent report some business income. Because a good deal of income of this group comes from running small businesses, 40 percent of the revenues from the higher taxes Obama would impose would come from small businesses, according to a study issued by the office of Senator Jim DeMint, a South Carolina Republican. In short, the president is proposing to raise taxes on many of the job creating entrepreneurs in America.
The good news is that a bipartisan consensus is forming to push radical tax reform such as was engineered by both parties in 1986, generating enough cash to allow the top individual rate to be cut to 28 percent from 50 percent. The plan being mooted in Congress would, among other things, remove or place limits on deductions of interest on home mortgages, end special tax advantages for the oil and other industries, and end the practice of allowing hedge fund operators to treat part of their incomes as capital gains. The additional revenue generated by these changes would be used to lower overall tax rates on individuals and corporations.
However desirable such a policy might be in the long run, it is unlikely to do much to spur growth in the near term. Which leaves us with Willie Sutton's advice versus the hard fact that the rich are not where additional tax revenue is, and the decision of the Federal Reserve Board to follow the suggestion of Chubby Checker and "do the twist"—move $400 billion of its $2.65 trillion securities portfolio into long- from short-term Treasury IOUs in the hope that still lower long-term rates will somehow spur investment. Most observers think that the Fed should get an "A" for effort and good intentions, but a far lower mark for results.
With Sutton and Checkers not useful as advisers, we are left with John Maynard Keynes, whose borrow-and-spend method has not seemed to work in current circumstances and as applied by this administration, and its opposite, austerity, now opposed by the International Monetary Fund because it seems to stifle growth and increase rather than decrease the deficit-to-GDP ratio wherever it is selected as the policy that will fix things. To say policy makers are out of bullets is to put their impotence in polite terms.
Just when George Soros says we are already in a recession. Whether or not he is correct, it certainly feels like we are. The IMF and the Fed are projecting anemic growth, and there isn't much difference from "the feel" of that and of a recession, certainly not for the 25 million looking for full-time work, or their increasingly nervous relatives and neighbors, witnesses to too many foreclosures.
The sense among informed observers here in Washington is that the president will get little or none of what he is asking for—his own staff privately says he has no expectation that a Republican House of Representatives will join his anti-rich crusade. His proposals are seen as a campaign ploy to please his sullen left, but he runs the risk of antagonizing the independent voters whose support put him in office. The last candidate to run as a class warrior was Al Gore, and he is reduced to searching for audiences for his increasingly vitriolic, profanity-laden presentations on global warming.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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