Should Wealthy People Pay More in Income Taxes?

One of my goals over the past couple years is to post at least once a week, either to this site or my personal site. That, despite the fact that some weeks my mind is more mushy than the monkey brains served to Indiana Jones during his family friendly descent through his heart rending rom com. Between the random May snow storms, my kids wrapping up school, and the neverending networking events, this is definitely that week.

So for inspiration, I turned to Quora. I get addicted to the online answering site, and after a few hours of giving (hopefully) helpful advice, I realized that, hey, maybe I should move one of my answers to this site as well. For this week’s target, I’ve selected that always fun point of debate: Should wealthy people pay more than half of their income to the government in tax?

Okay, well, maybe we don’t fight over the specific “more than half” amount. So let’s keep it general, and bold it for good measure:

Should the rich pay more income taxes?

The answer depends on what your purpose is in taxes.

It seems like it our purpose to taxation should be obvious, but it doesn’t. Do you want to manipulate the code to encourage certain behaviors? Do we want to push for more manufacturers in the US? Would you like more spending that savings? More Research & Development? Encourage charitable giving? Helping out those in need? Benefit those who contributed to your campaign without making it look too obvious?

The tax code tries to do all those things. So before you can answer whether the a certain group should pay more, we need to ask what you’re trying to accomplish.

If your goal is so you can keep a campaign promise to make the rich pay more, then this seems like an easy path to head down.

I know I’m a bit crazy here, but I’m of the opinion that taxes should be used primarily for raising money.

That leads to a few more crazy questions. Will raising income taxes on “the rich” (which would have to be defined) bring in more money? What will the economic cost of the tax raise be?

For example, let’s say we raise taxes on people who make over $10 million a year from a marginal rate of 39% all the way up to 70%. The government knows they’re not going to bring in $3.1 million more revenue. It’ll be less than that, since that wealthy person will hire a team of advisers to figure out how best move money around and reduce their tax bill. How much less? No idea. Nobody really knows for sure, though the CBO tries it’s best to guess with its room full of actuaries and economists.

Not only do we have to consider the amount raised, but we have to think of the economic consequences. What would that rich person have done with the money had they not paid it to the government? Maybe rather than putting it in Project A, which will be a huge boon to the economy, they stick it in Project B, which will shelter some of that income and have a much lower rate of return, but also be tax-free.

Or maybe they just would have frivolously spent the money on eating out, yachts, and super WASP-y boating wear. What a waste, right? Let’s take that money away from them. . .along with the jobs of those waiters, cooks, boat builders, designers, clothing manufacturers, etc., who depend on the frivolous rich for their livelihood.

Yes, a lot of jobs depend on this

My point of this isn’t that we shouldn’t raise taxes on the wealthy, but that if we do it based on a five second sound bite of political promises we’re going to get terrible policies. Every policy is going to have costs. If a politician tells you that all we have to do is flip over the mattresses of the wealthy and take some of the cash hidden underneath, you can be sure that they’re either (a) lying, or (b) wrong.

Which brings us back to the original question: should we raise taxes on the wealthy?

Tell me the benefits. Tell me the costs. Then we can discuss the answer. Pretending only one side of that equation exists puts us on the road to Venezuela.

If your point in all of this is just squishy moral preening, I’ll take a hard pass. Mixing morality and taxes together is not my thing.