Middle Class Will Be Most Victimized By a 4th Bracket for 1 Percent

Middle Class Will Be Most Victimized By a 4th Bracket for 1 Percent
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“Envy in reality is the most impoverishing attitude of thought.” – Warren Brookes, The Economy In Mind

Here’s a truly rhetorical question: who among us would reject higher compensation? Our work is our expression of our desire to get, and higher pay is the path to getting more in return for what we do each day. 

And with it established that most of us would like to earn more, it’s worth asking how.  Intuitively, we all know the answer.  This includes government workers.  They maybe know best: rising pay for those in the employ of government is an effect of rising tax receipts.  In that case, is it any surprise that federal compensation has grown so substantially since the 1980s? Not really.  Federal revenues have soared.

Applied to the private sector, just as rising federal compensation is an effect of federal tax collections, so is private sector pay an effect of what’s not taxed.  If the federal tax burden is reduced, there’s logically more funding for private-sector opportunity.  This is a statement of the obvious, and one most obviated by government pay.  

And if the obvious is accepted, we can then ask how best to increase the pay of those toiling in the private sector.  There are lots of ways, but it’s best to focus on two.  Rising pay is ultimately a function of rising productivity.  Investment is the driver of rising productivity.  Imagine how unproductive we would all be if a lack of savings and investment meant we worked farms with shovels instead of tractors, that we solely communicated by handwritten letter rather than over the internet, and that horses were our mode of transportation over cars and airplanes. 

When investors put savings to work, they’re doing so because they want to attain a multiple of the funds initially invested down the line.  What’s crucial here is that any advance almost by definition is going to attract doubters.  Change is its own driver of skepticism, plus most experiments fail.  All of this in mind, a stable currency is crucial as a source of wage-enhancing investment.  Absent good money, the act of investing is needlessly imperiled to a much greater degree.  Why delay consumption with an eye on returns in money that may or may not be exchangeable for much? Unstable money is a tax on investment.

So are income taxes.  There’s no getting around this.  Going back to our federal government example, pay in government is an effect of tax receipts.  Conversely, private sector pay is greatly influenced by what’s kept from government.  The more resources left in the private sector, the more investment without which there are no jobs, and no productivity enhancements that increase the value of our work. 

Taking this further, the rich, by virtue of being rich, uniquely have the means to invest.  Sorry, but there’s no getting around this truth.  That they have so much money means they uniquely have the means to pursue the investments that boost our productivity, and by extension, our wages. 

The above scenario does not describe poor and middle class earners.  As much as some might be hurt by what’s true, tax cuts for middle and poorer earners have very little economic or wage impact.  That they don’t is a statement of the obvious.  Precisely because they earn less than do the rich, any earnings increase through tax reductions will likely be directed toward consumption of life’s necessities and luxuries. There’s nothing wrong with spending on both, but jobs and productivity enhancements spring from earnings not spent

No doubt middle earners could save and invest all that the feds don’t take away, but they’re once again middle earners.  Since they are, their tax savings won’t amount to much.  No economic school gets around the latter.  We can try to spare feelings, but emotion is a lousy driver of economic policy.  Middle earners, by virtue of being middle earners, can’t stimulate economic growth through their tax savings simply because tax cuts for them don’t amount to very many dollars in aggregate.  The notion that middle earners are the “backbone of the U.S. economy” is the life equivalent of loving parents proudly displaying the indecipherable paintings of their five-year olds on the proverbial refrigerator.  Everyone feels good, but art isn’t advanced.  Neither do tax cuts for middle earners advance the economy.

Which brings us back to the rich.  It’s a known quantity at this point that the Republican leadership in Congress is seriously considering a fourth tax bracket that will penalize the earnings of the richest Americans at 39.6 percent or higher.  Ok, but explicit in such a tax is that the Republicans are taking aim at the earnings of those who aren’t rich. Such penalization of top earners will shrink the availability of the savings and investment necessary for more and betters jobs at higher rates of pay. 

That is so because the rich, quite unlike middle earners, logically have lots of earnings that are not spent.  That’s the luxury of being rich. One can fulfill myriad needs, and still have savings left over with which to invest.  But if the Republicans pursue tax stasis, or actual tax increases on top earners, there will be fewer untaxed dollars left over for the rich to put to work.  Conversely, if the Republicans seek major tax cuts for the rich, something the media will say they’ve done either way, the act of doing so will logically redound to the economic chances of those who aren’t rich.  Mathematical logic explains why.

Time, or maybe even a day or two, will reveal what the Republicans decide to do.  Assuming they take aim at the rich through the tax code, or even maintain the existing tax burden, logic tells us who will be most victimized by the politics of envy.  To tax those with the most is to tax everyone through the economy-sapping growth of government in concert with reduced private-sector investment necessary to expand our productivity, and by extension our wages.     

John Tamny is a speechwriter and writer of opinion pieces for clients, he's editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is The End of Work, about the exciting explosion of remunerative jobs that don't feel at all like work.  He's also the author of Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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