On Taxing The Rich And Other Options

I want to share some thoughts I recently sent to a relative concerning taxation.

This was triggered by a recent spate of what I view as mean-spirited comments about how lucky poor people are, since they don't have to pay income tax. Of course, if they have a job, they pay payroll tax and Medicare tax, as well as state taxes like sales tax and property taxes (if they own anything at all).

The discussion has become more heated since the disclosure that many super wealthy individuals pay income tax at a lower rate than their secretaries.

A frequent question is, "what's fair?" This may be the wrong question. I think a better question is, "what taxation policy leads to greater general prosperity?" That is, "what works best?" But we need to keep the goal in mind - improved general prosperity.

I shared the following thoughts:

There is, of course, a whole literature on taxation issues. Some of it is even interesting. I commend to your interest the article at this link and the ensuing discussion.

I find the idea of taxing the superrich at a marginal rate of 70% intriguing. Some things I know because I have lived a long time and have been paying attention for most of that time. I know, for example, that the period of greatest general prosperity in this country (say, 1946 to 1976) was also a period of high marginal income tax rates and a very progressive tax structure. It was also a period of powerful (or at least influential) labor unions.

In that period, banking was a pretty boring activity. Bankers were generally stolid and unimaginative, but reliable. Interest rates were low. Regulations to insure a stable banking system were pretty strict. Savings and Loans played an essential role in expanding the nation's housing stock at affordable prices.

There was great concern after the war over the possibility of high inflation, but also over the possibility of a postwar depression. Neither happened, in part because we had a skilled bunch of economists working to bring us in for a soft landing. Elements of the solution: GI Bill took millions of returning GI's off the labor market during a crucial period; the Marshall Plan provided the wherewithal to foreign countries to buy industrial and agricultural products from us (anti-depressant); great pent up demand for housing and automobiles as well as other durable goods, plus significant savings accumulated during the war (war bonds, etc) when there was little to buy, anyhow and what there was was rationed.

These were all practical measures, mostly driven by what works.

My view of economics is that it should continue to be driven by what works, not by theories (or conjecture or assertion) divorced from reality and unsupported by real world data.

By the way, if you are looking for a country with low (or no) taxation, little regulation, etc. I can think of several.  Somalia comes to mind.

I have no problem with the idea that people with little income should pay no income tax.

I do have a problem with measures favoring one kind of income over another. Why shouldn't we value wages and salaries at least as high as dividends and capital gains?

How about a flat income tax deduction? Same for everybody. You want to buy a mansion? Fine. You get the same housing deduction as the guy who rents. 

Just a thought.