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Assume our preference for redistribution is fixed and that there is an inherent and unchanging desire in the population to equalize incomes, for whatever reason you wish to believe we have that feeling. I for one do not share this belief, nor am I rich. In any case, I believe that one reason folks like the idea of taxing the rich more and taxing corporations more is that it is simply easy to say and do. In other words, I think the plea to “tax the rich” is emblematic of the larger degree of laziness that we wrote about a few weeks ago here. It’s easy to think up, and it sounds good, so folks probably don’t want to or are simply unable to think through the implications of this preference.

One implication of taxing the rich is that it is likely to exacerbate measured inequality even as it likely mitigates actual inequality. It is reasonable to think that if the (formal) supply of labor is adversely impacted by high marginal tax rates this will put upward pressure on wages (remember, unless we have fixed factors, the net well being of folks is hard to change via policy), leaving the wage distribution wider after the tax than before it was implemented. This is not a problem unless the intellectually lazy folks are the ones pushing policy. And indeed I suggest that they are. These lazy folks will see more inequality (measured) and say, “aha! we just need to tax the rich more! You see, taxes don’t hurt wages!” And of course they are wrong. So we raise taxes some more. Measured inequality increases. Rinse and repeat. This is sort of like how declining cities operate. First a city overbuilds its infrastructure in good times (we need many posts to discuss why they do this). Then the city, overly reliant on a few industries or lifestyles, declines (or just by accident it declines). People move out. Property values fall. But the city wishes to continue paying all of its government workers and continue providing the same infrastructure and services as before. So it raises taxes on the few fools that remain in the city. Which drives them away. So the city raises the taxes on the even fewer remaining residents. They don’t even try to sell their homes, as the accrued value of their tax liabilities eventually exceed the value of their homes. They just walk away. Entire swaths of urban areas become vacated. Taxes rise. And then we raise taxes even higher on businesses that remain – because that’s “where the money is.” They die and leave or never get started. Then you have Buffalo, Utica, Detroit, etc.

But the point of the post today is that this laziness can cause even worse problems. One major reason folks wish to equate incomes is that they are worried about the undue influence the rich have on the political process. Now of course this attitude is itself lazy insofar as folks can only imagine that higher taxes would mitigate it. Think about why. First of all, collecting more taxes will actually create (absent disincentive effects) more revenues to the government. And if the government has more revenue, it is prone to even more corruption and abuse of power. Indeed, this is why I say the tax the rich meme is lazy. If the rich do indeed buy their way to influence and power via government, one way to think about mitigating this is by reducing their income. But there is no reason to prefer that mechanism, on its face, over reducing the desire to use the government to wield power. And the way to do that is to make the government itself less powerful or smaller or both. Thinking of taxing the rich as the solution to the “rich buy political power” problem is no different than thinking the only way to lose weight is to eat less, wholly ignoring other lifestyle changes such as getting more exercise. Yet redistributionists proudly advocate policies like this.

But think about higher corporate and individual taxes in this environment. Might they not backfire and produce even more corruption, favoritism and rich influence in the political process than before? If the rich are going to be subject to awesome taxes, outside of their ability to shelter income or do business elsewhere, now they have even more of an incentive to interact with the political process, to buy favors, to buy off elected officials, to influence policy – not just directly to have their taxes lowered, but indirectly to have their actual taxable liability lower. They are sure to have carved out for them special exemptions in the tax code, or special provisions that make it easy for the influential wealthy guys to pay little or none of the new taxes, leaving a few honest weakly wealthy guys paying even more. On the corporate side, look no further than General Electric (aka “Government” Electric) and their thousands of pages of tax forms to produce zero income tax liability for them. It is simply not clear a priori that raising taxes on the rich and on corporations will do anything to mitigate the problem of influence peddling. Yet I have seen nary an article or blog post that is discussing reasons to favor or not favor taxing the rich more which have mentioned this idea in the slightest. Either people are lazy (as I suggest they are) or nefarious. In any case, it is irresponsible and hard to take anyone seriously on the tax issue if they are not at least asking the question, “are we sure this is going to do what we say it is going to do?” But why should I expect anyone to do that? They are, after all, all educated in the cookie-cutter anti-reason world of K12 and College Education where “why” can only be answered with, “it makes us feel good.” 

3 Responses to “On Taxing the Rich (and Corporations) at Really High Rates”

  1. jb says:

    The point about the direct relationship between a corporation’s (or anyone’s) incentive to lobby for preferential tax (or regulatory) treatment, and the marginal rate at which they are taxed (or regulated) is crucial as it is obvious (at least to economists). But one that the media almost NEVER addresses.

    A corporation has to deploy resources to maximize its profits. It can do so by investing and innovating, (building better widgets, etc.) or by other means, one of which is to lobby for preferential tax treatment, subsidies, regulations to limit competition etc. It can be expected do choose from among these, that which will have the greatest “bang for the buck” in terms of boosting the bottom line.

    Our challenge is to dismantle that lazy refrain that “corporations are evil”. It means that we must respond, when our “liberal” friends lazily (though indignantly) assert that “corporations control America”, by pointing out that a corporation is simply an assembly of people with a common objective. It is comprised of rational, honest, hard working people (corporate boards and execs) simply behaving rationally and fulfilling their moral obligation to maximize shareholder wealth. And it doesn’t hurt to remind them that if they pension, 401(k) or mutual fund they are indirectly, a “shareholder.”

    We need to hammer it home: If you want to reduce or eliminate corporate influence on tax policymakers, eliminate the corporate income tax, or simply reduce marginal rates to the point at which it is better for the firm to invest in innovating, rather than lobbying.

  2. Harry says:

    Good points, Wintercow.

    I would add that high income tax rates benefit state and municipal borrowers, creating an incentive to borrow imprudently to finance public pensions, light and high-speed rail, Carrara marble public buildings, etc. A 25% federal rate is bad news for spendthrift governors and mayors, as well as for investors who bought municipal bonds when tax rates were higher.

    Come to think of it, that would be another way to screw the rich — cut the value of their municipal bonds. The OWS crowd should love this.

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