Economist Paul Krugman wrote this week in the NY Times that there is no reason that tax rates on the super wealthy shouldn't go higher than they were during the Clinton era -- 39%. Certainly, nobody has been wiser or more correct regarding the economy and taxation than Krugman has during the last four years.
But let's assume for a minute that the Occupy Wall Street movement swells into a genuine progressive movement, conservatives are tossed out of control of the House and Senate and Obama stays in the White House. What should we, as progressives, set as our ideal income-tax rate on the wealthy? Krugman says it should be higher than 39%.
I suspect most of us here in the Liberal/Progressive blogosphere would like it much higher, perhaps double for those making more than a million dollars a year. But would this really help raise more money or create a fairer society in the long run?
I have my doubts.
Here's the problem I see with raising taxes beyond 39% -- it creates a backlash and permanently aligns the wealthy with the reactionary right, thus funding our enemies.
Let's talk reality. Sure there are the Warren Buffets, Bill Gates and Bonos who are selfless and eager to pay higher taxes. But most wealthy people, like most people of all economic classes, are selfish and want to keep as much money as they can. At a certain point of taxation, you make rich people feel so burdened that they spend all of their time hating the government and trying to subvert taxes through phony foundations, loopholes, off-shore ventures, etc.
When Ronald Reagan got a million-dollar-a-year contract with a movie studio in 1945, the top tax rate was 94%. He reasoned, correctly, that he would only be able to command this kind of a salary for a few years and then his pay would drastically shrink. Since he might only have a few good high-income years he grew to hate the government, taxes, and Democrats. He then led a movement to discredit government that we still haven't recovered from. Imagine if in 1945, Reagan had been able to keep, say 55%, of his earnings. I'd be willing to wager he would never have entered politics and all of us on the liberal side of the isle would be a thousand times better off.
The problem with raising income taxes over a certain level is that it becomes the motivating factor in rich people's lives. Hence you have wildly wealthy people who are pro-choice, pro-gay rights, pro-progressive on every social issue in the world giving million-dollar contributions to the Republican Party so that it can back candidates who are social Neanderthals who happen to favor cutting income taxes.
The other big problem with income tax rates above a certain level is that the really rich simply spend fortunes on smart tax attorneys to dodge the taxes. The problem is that these really rich people who might otherwise be doing productive things with their lives become totally pre-occupied with estate planning because they deduce, sometimes correctly, that if they spend 90% of their time for seven years rearranging their estate they can decrease their tax burden by, say, $50 million when they die.
Let's face it; most really rich people aren't social or religious conservatives. Really rich people, in general, have traveled the world and have been exposed to new ideas, cultures and religions. Sure, they might still be bigots, but they really are not comfortable with the typical religious-right Republican. Also, wildly successful entrepreneurs who make hundreds of millions of dollars are usually smart. And since the Republican Party has officially become the "Stupid Party," most successful entrepreneurs don't respect the Republican Party -- though many support it solely for the issue of marginal tax rates.
It's true that the second and third generations of the really wealthy are often idiots, but they typically are not conservative idiots. The super wealthy children can indulge themselves in cocaine parties, $500 bottles of champagne or bring an entire bale of marijuana to the first day of college (as one well-heeled dorm mate of mine did). These sorts of activities tend to make one less interested in fundamentalist religious activities or banning abortion nonsense.
No, I'm not buying into the right-wing propaganda that we Democrats want to "punish success." No, I don't believe that taxes are evil. And I'm not suggesting we buy into the myth that if we raise taxes on the wealthy they will just stop working and making money. I think they will work even harder; it's just that most of their work hours will go toward tax dodging and attending fundraisers for our enemies.
But at some point, we Liberal/Progressives will come back to power. We will be able to increase the top marginal tax rates. I'm suggesting we come up with a rate that takes into account that most people do have some level of selfishness and if we raise rates too high, we plant the seeds for future Ronald Reagans to sprout. Thus, we will needlessly fund social Neanderthals and reactionaries into the next generation.
I think the Clinton-era 39% is high enough to increase progressivity, increase actual revenues, and yet not so high as to create numerous unintended political backlashes. What do you think the top tax rate should be? But before you blurt out 94%, please think about the consequences of giving financial aid and comfort to our enemies if the number is too high.