Tax the Rich: It’s Actually Pretty Good For Them Too

Stan Duncan

A number of economists of both the right and the left have said that we can no longer sustain the Bush-era tax cuts and allowing them to expire is the only way to cut into the budget deficit. The biggest difference between conservatives and the liberals on this (when there actually is one) is that the conservatives--who include Alan Greenspan and David Stockman, architect of the huge Reagan tax cuts of the 1980s--say that we should let all of the tax cuts expire and the liberals say we should cancel just those of the top two percent. And many liberals actually agree on that too. Some conservatives, like David Brooks agree that the tax cuts have to go, but think we should phase them out over two years. I think they should go now, but I could live with that as a compromise.

  Taken together, this is a fairly strong consensus, with the differences being nuances over timing and degree, not over principle. It makes one wonder how the Republican/Fox/talkshow/pundits were able to say with a straight face that ALL of the logic was on the side of keeping the tax cuts. Or it causes one to ask how it was that the Democrats so seriously failed to make the case for an alternative to the story.

  At the risk of sounding like simple Econ 101, here is the basic outline of why higher taxes for the wealthy make sense for everyone, including the wealthy. Why everyone, including the rich, benefit in an economy when wealthy people and corporations are taxed at a higher percentage rate than the rest of us.

   First, a very brief word on where we are. When President Bush came into office in 2001, we had an historic budget surplus. Not all of that was due to President Clinton’s policies, though he would probably say it was. But for what ever reason, we had a huge surplus. When George Bush left office, we had a huge deficit. As much as the Rep/Fox/pundits would love to make you believe it is so, the collapse of the historic surplus is not because of Barak Obama who came into office after the rise of the deficit.
The three biggest causes of the huge deficit were these:

1. President Bush fought two wars without any plans for paying for them. The cost of the Iraq war alone is in the neighborhood of one trillion dollars and counting. By the end of the next decade, with hundreds of billions of dollars being paid out in disability payments to soldiers, it will probably top off at three trillion dollars.
2. He cut taxes three times (2001, 2, and 8) in the middle of those wars for a total of about two trillion dollars without any plans to pay for them (actually, he claimed that the wealthy would have more to invest and that eventually it would help everyone, but that didn’t happen),
3. He passed a major drug plan without any plans for paying for it.
4. In 2008, for reasons that were not totally his fault, we fell into a deep recession and suddenly tax revenue dried up. The federal out-go increased with things like unemployment and food stamps, and its income went down with literally millions of people losing their jobs.   

Again, in spite of what Mitch McConnell, John Boenher and the Rep/Fox/pundit chorus, all of these things happened before Barak Obama came into office. There also were, at the end of Bush's term and the beginning of Obama's, a large bank bailout and a stimulus package, but even taken together these never came close to the magnitude of the cuts in income and increases in spending of the Bush era.   


   So, that’s where we are. In his first months in office, Barak Obama put together a bi-partisan stimulus package that was basically in three parts.

1. One part “shovel-ready” payouts that are still being paid out,
2. One part tax cuts which are notoriously ineffective for stimulus but designed to win over Republicans to vote for it (and that worked out well, didn’t it),
3. And one part to take up the slack in states that had to cut spending because of their ill-advised balanced budget requirements.

   The “Stimulus” did help, but not overwhelmingly, and because of that it unfortunately allowed the Rep/Fox/pundits to claim dishonestly that it not only did not help but actually caused harm (harm? Yes, that’s what they said).

   So, here’s why increasing the taxes on the wealthy makes sense, and it’s really not all that complicated. Let’s call it the Henry Ford Theory of Tax increases because he was an early proponent of the theory. Ford, as you may recall was a leader in paying his workers a decent wage because he had so many of them that if they were poor and couldn't buy his cars, he would feel it. It would keep down his car sales. So, he paid them living wages so that they could purchase his product and help him grow rich. Pay your workers more so that they can buy your stuff and everybody gets happy.

   When applied to taxes, the idea is that wealthy individuals and corporations make things and they want to sell them because they want to make a profit. (In today’s economy they often make them in Mexico or China, but they still want someone to buy them.) If the people on the very bottom of the society are kept dirt poor all the time, it keeps them from buying the stuff that the rich produce or invest in. If you keep the minimum wage low, and keep their incomes low, it may be easier for you to hire them to clean your house for a song, but it also makes it harder for them to buy your refrigerators, microwaves and autos. So, to help this situation and to help people in the long run, the government has to spread some of that wealth down to the bottom so that the people there can have a (slightly) higher standard of living and thus buy the products made or invested in by the wealthy.

   Ways to do that include earned income tax credits (a Reagan idea, by the way, but opposed as too liberal today by Republicans), or extended unemployment insurance, or just lower taxes. Ironically, tax cuts for the poor and middle class usually have much more bang for the buck in terms of stimulus in a recession than do tax cuts for the wealthy. The reason is that the wealthy don’t see and feel their tax cuts and they seldom change their consumption patterns with it. But the poor use their tax cuts to buy groceries, or make car payments. They push their new money out the door fast and it benefits the economy more quickly.

   So, by taxing the rich and giving it to the poor in an old fashioned “FDR” way (because FDR did this), the rich eventually---five or six years down the pike---will get the money back again because the poor are now able to buy things, lift the economy, and that generates more income for the rich. In the long run everyone benefits and the rich don’t have to be stuck with looking like bad guys for not wanting to share with the poor. It’s a logical way to help the economy, easy to see, easy to understand, but one that is never even acknowledged to be on the planet by the Rep/Fox/pundit voting block.