A Truly Pro-Growth Tax Package Includes Big Tax Cuts for the Rich
In the film The Sound of Music (1965), one of the characters, Max Detweiler, declares, “I like rich people. I like the way they live. I like the way I live when I’m with them.”
I get it. Indeed, many people do. But there’s a heck of a lot more to rich people than fast cars, big houses, nice food, and yachts. From an economist’s perspective, there are three key reasons why rich people rock.
First, in a free market system, there’s really only one way to legitimately earn considerable wealth, and that’s by supplying goods or services that other people want or need. In another movie, Wall Street, an ignorant, cartoonish look at capitalism courtesy of Oliver Stone, the main character, Gordon Gekko, infamously declared that “greed is good.” The implication was that capitalism was just a game driven by greed. In reality, though, no matter what the internal motivations might be of any individual, the free enterprise system requires one to look to others first in order to achieve success. That’s certainly not the case with socialism or the welfare state. So, in a capitalist economy, rich people get rich by creating value for others.
Second, rich people have the wherewithal to supply the financial capital that entrepreneurs need to grow new businesses, thereby driving economic and job growth. When I taught an MBA course on innovation and entrepreneurship, I would remind students that in order to grow a business, it was a waste of time to come to some adjunct professor, for example, for funding. Instead, they needed to go to angel investors or venture capitalists, depending on the point of development in the business. That is, they need to go to rich people who have the resources to invest. So, just as labor and business owners need each other to make a business function and succeed, they also need individuals with the ability and willingness to lend and invest.
Third, even if rich people don’t invest, but instead decide to spend the wealth they have earned, such spending still has value to others. For example, consider that the big tax increase of 1990 included a luxury tax, including on yachts. So, who got hurt by this tax? Well, those seeking to purchase yachts ventured into international waters to do so. Meanwhile, the U.S. boat building industry was hit with lost business and big layoffs. Tax the rich, and hurt those who are not rich. Go figure.
Despite these straightforward economic realities about rich people, people still seek to impose policies – like high, progressive income taxes, death taxes and luxury taxes – that wind up reducing resources and incentives for growing businesses, investing in entrepreneurial ventures, and spending on goods produced by people from all levels of income. But why? Why go down the path of “soaking the rich,” as they say? The answer is a combination of zero-sum thinking, a love of government, and/or the sin of envy.
It seems easy for people to slip into zero-sum thinking, that is, the deeply mistaken notion that if somebody’s getting rich, then somebody else is getting screwed. After all, there’s only so much to go around, right? No. Wrong. This misses the simple facts of wealth creation and economic growth. In fact, when someone’s getting rich in a free market system, that actually means lots of other people are benefitting as well.
Meanwhile, lovers of government talk themselves into the idea that politicians somehow know how to spend and invest dollars better than the people who earned the money, as well as better than private-sector investors and businesses actually disciplined by prices, profits and losses. I often think of the famous investor Warren Buffet, who seems to love the idea of higher taxes on rich people. In effect, Buffet is arguing that politicians will make better investment decisions than Buffet himself. That’s peculiar. After decades of noteworthy investment successes, could Buffet truly suffer from such a striking lack of self-confidence? Or, is he just ill-informed on matters of basic economics and public policy?
As for envy, it’s certainly nothing new. Unfortunately, in an era of activist of government, personal envy can reach a critical mass and be acted on via public policies resulting in broad economic ills.
Policymaking during the Obama administration rooted in envy and a love of government inflicted considerable harm on the economy. The Trump administration largely has moved in a different direction. On taxes, for example, the plan being discussed now would substantially drop income tax rates on businesses. That’s a big positive. However, on the individual side, there apparently would be much smaller gains, especially for upper incomes. The top individual tax rate would only decline from 39.6 percent to, at best, 35 percent (perhaps higher). If that winds up being the case in the end, the effectiveness of such a tax package will be limited accordingly. Pro-growth tax reform demands that the top individual tax rate at least be reduced to where it was after the Reagan 1986 reform, that is, 28 percent. Unfortunately, rhetoric from administration officials – such as emphasizing the middle class and talking positively about progressive taxation – indicates a reluctance, perhaps for political reasons, to emphasize that tax relief for upper-income individuals would be a positive policy development.
If Americans want tax reform to be pro-growth, then it’s time to recognize that rates need to be deeply cut across the board, including on the rich. Again, when it comes to the economy, rich people rock!