Why Raising Taxes on the Wealthy Makes Economic Sense

To Everyone Else But the Wealthy (Of Course)

The term “Class Warfare” is what Conservatives use to hide the fact that they cannot and will not engage in a rational discussion about the need to raise taxes on high income, high net worth taxpayers.  Because they do not have a basis in basic economics with which to make the argument that if taxes need to be raised, they need to be raised on the wealthy, they simply dismiss any discussion as “Class Warfare” and goodness knows we don’t want that, do we.

Let’s start with the basic assumption that in order to bring U. S. fiscal matters in better balance we need to balance increased taxes and decreased spending against the harm that such fiscal policy will do to economic activity.  Conservatives contend that raising taxes will reduce economic activity, and they are correct! (Wow, didn’t see that coming did you?)  But cutting government spending will reduce economic activity also.

So what is the best way to achieve fiscal control with minimal damage to the economy?  Look at this picture of the distribution of income and net worth between the top 1%, the next 9% and the bottom 90% in the U. S. economy (thanks to Jared Bernstein for a great graph).

The important thing here is the concentration of wealth in the upper 10% of the population.  In fact, the top 10% has 74% of the total wealth.  Why is this important from a fiscal policy point of view?  Because if taxes are raised on the top 10% of taxpayers, some of that increased tax will come from liquidation of their wealth.  If taxes on Mr. and Mrs. Gotmoney go up by $100,000 on their combined income of $2 million, then the Gotmoney’s will have to come up with $100,000 more in funds.

Since the Gotmoney’s may have a net worth of $10 million, they will like liquidate some of those investments, say $40,000 worth and use that money along with a reduction in $60,000 in spending to pay the extra tax.  So even though taxes go up by $100,000, private spending goes down by only $60,000.

Now if the government, in its infinite wisdom, spends the newly received $100,000, then total spending in the economy is increased by that $40,000.  The result of the government raising taxes on the wealthy by $100,000 and spending an extra $100,000 is to stimulate the economy by injecting $40,000 of net increased spending into the system, Conservative arguments to the contrary. This doesn’t work if the extra taxes come from low and middle income taxpayers, they do not have the wealth to liquidate to pay part of the extra tax.

So the reason why Conservatives call of this “Class Warfare” is that they have no other way to fight the logic of this analysis.  They hate raising taxes on very wealthy individuals, they just cannot articulate a good reason why they should not.