Friday, December 3, 2010

Politics is complicated, part ii

I have pretty much no moral qualms about borderline confiscatory tax rates on upper income brackets. I mean, I'm not necessarily for them...but the argument that's going to sway me probably isn't, "Won't somebody, please, think of the rich people!" It may not be technically fair (although, seeing as the very rich benefit quite a bit from government in general, I think a lot of it is fair), but life isn't fair, and the unfairness that some people might be less better off than the rest of us than they would otherwise be isn't really the kind of unfairness that tugs at my heartstrings. I'm also pretty dubious about the economic arguments for why we can't tax the rich too much. I suspect the Ayn Randian fantasy that somehow the very most valuable workers will opt out of the workforce severely discounts how much people at that level work for prestige and recognition rather than the ability to buy things, and I question whether the economy is actually driven by a class of super geniuses who couldn't be replaced by say, two people each being paid half as much. (Hey! Maybe high taxes on the rich creates jobs!) I'm also confused by the arguments that this income being taxed in the upper brackets has anything to do with small business investment. Aren't business expenses taxed differently? I suppose if the tax law is badly written, there could be business expenses that are not being treated as such and taxed along with personal income...but anecdotally, based on the girl I knew in college who drove an SUV that belonged to her dad's company, I get the feeling it mostly goes in the other direction.

But this is about why politics is complicated, not why taxing the rich is a no brainer. So here's why....the incomes of the rich aren't as stable as the rest of us, and so making them the foundation of the government's revenue stream makes that unstable as well. Revenue is always going to go down during an economic recession....unemployed people pay fewer taxes than employed people. But the more progressive the tax code is, the more magnified this effect is going to be. Upper brackets affect the last x dollars that a person earns...exactly the same dollars that are affected if your pay gets cut, or you don't get a bonus this year. I should probably have a citation for this, but I think variable things like bonuses become a more significant part of your income the richer you are. This wouldn't matter as much if governments practiced Keynesian self restraint and saved surpluses to cover future revenue shortfalls...or heck, even borrowed against future surpluses to cover current revenue shortfalls. But in the real world, where politics demands that a budget surplus be spent on something immediate and popular and that deficits during downturns be treated with panicked hyperbole that the government is bankrupt, I think it's something to be avoided.

(Which is not, of course, to say that I favor extending the Bush tax cuts on income over $250,000...just that there is some limit to how progressive the tax code should be.)

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