Taxing the Wealthy or Not, Essay Example

Like a fever that comes and goes, the question of whether or not to increase taxation of the wealthy is never far from raising the temperature of the American body politic. Currently, Democratic presidential candidates Hillary Clinton and Bernie Sanders favor increasing taxation of the wealthy, a position generally opposed by Republicans (Cohen). In this paper I will argue that attempts to substantially increase taxation of the wealthy have failed repeatedly in the past because of an inability on the part of the voters to shake the fear that they may one day become defined as wealthy and taxed as such by political candidates like Clinton and Sanders. And the latter two (and many, many others) have not been able to convince enough voters that imposing new wealth-taxes will create more wealth (for example by opening up opportunities in healthcare and education to those for whom such opportunities are now denied due to their high relative cost) than they will consume through bureaucratic overhead. I take it as a given that essentially the same thing will happen this time around, and the effort will neither help nor hurt the United States in the near term. Any radical measures will be whittled away over time.

Fear of taxation is reasonable. The problem we face is one of definition. What exactly is “wealthy” and exactly how do you measure it? Charles Kenny, writing in Foreign Policy, points out that by global standards, “America’s middle class is also really, really rich” (Kenny). The late urbanologist Jane Jacobs made the same basic point in her book Cities and the Wealth of Nations when she pointed out that “stagflation” was a poverty-creating condition of “high prices and too little work” that could be found around the world, and that one person’s high price was another person’s bargain-basement (Jacobs). This is not just a moot philosophical matter avoidable by ignoring the rest of the world , because this relative difference of what constitutes poverty and wealth exists throughout the United States as well as the rest of the world — think of rural Southerners in comparison with rural Nebraskans, for example. If we are going to raise taxes on a specific set of people, we must first decide who those specific people are going to be helping, or, to put it another way, what governmental programs are going to get additional funding and what new governmental programs are going to be legislated. All this would be hashed out in the headlines, late-night talk shows, the Web, Congress, and the White House. The outcome will depend on current events as well. A major terrorist event would probably derail such a measure, or at the least redirect the money raised to national defense expenditures.

But who will decide this and how it will be done? It will take Congress working with the president. We saw an example of the effectiveness of this during the famous (if now forgotten) “fiscal cliff” crisis of 2012, which resulted in the American Taxpayer Relief Act of 2012 (GPO). Unlike the current call for increased wealth-taxes, which is based on the recurring perception among Americans that “excessive” income inequality is just generally un-American, the “fiscal cliff” was an immediate crisis of budgeting. The government itself faced a shutdown and some government departments did shut down. But for all the sound and fury of the crises, the resolution did not bring any radical changes. There were marginal adjustments made in various tax rates that did not come close to actually solving the problem of excessive government spending and excessive debt, but did do the critical work of delaying the need for further action until later. During the crisis, there was the expected disagreements between the most dispassionate economists — people whose jobs were safe no matter what the outcome — on the most fundamental points as to how best to resolve the matter (Ydiste). Some said raise taxes, others said not to raise taxes, others said the manner of raising them mattered the most.

This disagreement on economic fundamentals will not go away if and when Congress and the president decide to impose new taxes specifically on the wealthy. Not the least to be considered will be ways to prevent those wealthy from shielding their income from any new taxes. This is an important matter. Legions of tax attorneys make their livings advising their clients on how to shelter their income in ways that range from perfectly legal to iffy to illegal. The wealthy will not sit idly by while lawmakers set about figuring out who among them to tax and how much. As in many other areas of their lives, the wealthy have opportunities and resources that the rest of us lack and that goes for tax avoidance too. So right away we can see that the matter of increasing taxation on a select but powerful few is also a matter of tax reform. Innumerable tax-reform efforts have come and gone and the more things change regarding tax reform the more they stay the same. Basically the call for tax reform never goes away, and one of the reasons for that is that the wealthy do not necessarily earn their wealth as taxable income. They deliberately avoid those taxes in a variety of ways. Those ways would have to be curtailed. The only way that could be done would be with a flat tax. Such attempts have always failed.

Another problem facing candidates like Clinton and Sanders is that wealthy Americans already pay far more taxes than the rest of us. As Patricia Cohen points out in her article (cited above), “The top 1 percent on average already pay roughly a third of their incomes to the federal government . . . the 95th to 99th percentile, pay on average about $1 out of every $4. Those in the bottom half pay less than $1 out of every $10” (Cohen). The further down you go on the percentage scale, the more people would be affected by a tax hike. The top one percent is about 1.13 million households with an annual income of $2.1 million each. According to a study cited by Cohen, there were 1,128,000 taxpayers in the top 1%. The next bracket down (95 to 99% of the top fifth) had 4,422,000 taxpayers. The top 80 to 90% of the top fifth of taxpayers numbered 12,247,000. There were at the time 23,717,000 total taxpayers in the top fifth range. Cohen reports a study that claims that raising the top 1 percenters’ “total tax burden to, say, 40 percent would generate about $157 billion in revenue the first year. Increasing it to 45 percent brings in a whopping $276 billion . . . the average household in this group would still take home at least $1 million a year” (Cohen). Many of those people no doubt feel that they pay enough. It won’t make them feel better that economists like Joseph E. Stiglitz, winner of a Nobel prize in economics, reportedly said “The only upside of the concentration of the wealth at the top is that they have more money to pay in taxes” (Cohen). But where is that money? In a vault somewhere?

Some of it is in a vault somewhere and of course there is much money in bank accounts. But most of it is not immediately available for conversion into cash. Most family wealth is held in stocks and stock options, bonds, businesses, buildings, patents, inventions, royalties, copyrights, estates, intellectual properties of all kinds, etc. Cash is trash some say (although, true to form, economists disagree). In other words, what once was cash or could have been cash was instead invested in things. This entailed risk. Risk is a big part of wealth creation — ask anyone who has started a business (most of which fail). Getting at this wealth for taxation purposes will not be easy. We can safely assume that there will be all kinds of unintended consequences. Consider the matter, mentioned above, of who and what is going to spend that revenue. The Cohen article cites the providing of free tuition to all public colleges and universities, free universal kindergarten, infrastructure, and the national debt. These would only indirectly benefit the bottom-level taxpayers who pay “$1 out of every $10” (Cohen), which leads to another problem: at what point in the upper-income regions does extra taxation stop? Will taxation of the ultra rich become a slippery slope? It almost certainly would be and Americans, even those not in the top tax-brackets, surely know this to be true. According to the Cohen article, there were 28,192,000 taxpayers earning a little over $100,000 per year. Would they be next?

They probably would be eventually, if the tax on the super-rich went through. But if it did not go through, they would be relatively safe from that particular threat, if only for the moment. But we need to look at one final thing: are the rich guilty of greed as they are often accused of being? Or are they ambitious instead? Is there a difference? Many people who are not wealthy themselves enjoy the sense that the wealthy should be punished for being wealthy, that being wealthy is an indication of some kind of moral failing on their part and on the nation or culture that permits such wealth. “There is something profoundly wrong when the top one-tenth of one percent owns almost as much wealth as the bottom 90 percent . . . The issue of wealth and income inequality is the great moral issue of our time, it is the great economic issue of our time, and it is the great political issue of our time,” claims Bernie Sanders (Sanders).

What Sanders and his ilk apparently think is that wealth-creation can be mandated in the name of what is right and good, one example being the proposal to increase wealth at the bottom by increasing the minimum wage. But what is not often or even ever discussed — even by many Republicans — is that the recipients of the higher minimum will have to earn that increase, either through higher productivity or higher education or both. The increase is not a gift. It’s an order: get to work. That means a lot of marginally unproductive people currently working will lose their jobs, some of them being too old and others too young but in any case incapable of measurably higher productivity. Their places will be quickly filled unless those places disappear. Some will.

Regardless of whom is elected president, taxes on the wealthy will increase manageably if that. To paraphrase Pogo, we voters have met the to-be-taxed and they are us (Kelly).

Works Cited

Cohen, Patricia. New York Times. 16 October 2016. Article. 1 December 2015.

GPO. “The American Taxpayer Relief Act of 2012.” 1 January 2013. GPO.gov. Document. 1 December 2015.

Jacobs, Jane. Cities and the Wealth of Nations. New York : Vintage Books, 1984. Paperback.

Kelly, Walt. Pogo: We Have Met the Enemy and He is Us. New York: Simon & Schuster, 1972. Book.

Kenny, Charles. Foreign Policy: We’re All the 1%. 27 February 2012. Website. 1 December 2015.

Sanders, Bernie. Bernie 2016. 2015. Web page. 1 December 2015.

Ydiste, John. It’s All Politics. 30 November 2012. Website. 1 December 2015.