Taxing the wealthy will not kill jobs

Thomas Masterson | October 21, 2011

I study the distribution of wealth and income here at the Levy Institute, so I read the first five hundred words of Robert Samuelson’s Washington Post column on inequality (“The backlash against the rich,” Oct. 9th) with interest and approval. But I knew it couldn’t last. Once Samuelson gets beyond description and attempts explanation and analysis, he is clearly out of his depth.

Samuelson turns his gaze to the proposal to raise income taxes on those with incomes above a million dollars, whom he refers to as “job creators”—a Republican Party talking point that Samuelson repeats uncritically. He makes two mistakes in citing a paper, written by my colleague Ed Wolff, in which the distribution of assets for the top 1% of households by wealth (total assets minus total debt) is compared to the distribution for the bottom 80%. First, Samuelson seems to assume that those people who own privately held businesses are small business owners. Second, not all of the people in the top 1% of household wealth are households making more than $1 million a year in income.

In Ed Wolff’s paper we see that the wealthiest 1% of U.S. households in 2007 held more than half of their net worth in “unincorporated business equity and other real estate,” and only 26% in financial assets such as stocks, mutual funds, bonds, etc. It is clear that Samuelson is translating the former category as “small and medium-sized companies.” This could be an honest mistake. But it is a mistake. There is no evidence in Ed Wolff’s paper that the top 1% contains all (or no) “small business owners.” Just that they hold twice as much wealth in privately held businesses as in publicly traded businesses.  And as Kevin Drum of Mother Jones put it, “[w]e’re talking about people who earn upwards of a million dollars a year, after all. You don’t get that from taking a minority stake in your brother-in-law’s auto shop.”

If we actually look at those U.S. households receiving $1 million or more in income (using the 2007 Survey of Consumer Finances, as Ed Wolff does), we are talking about 0.37% of households. In terms of the composition of their assets, the picture is pretty much the same for them as for the wealthiest 1% of U.S. households.  But only 24% of the top 1% of household wealth are in the million-dollar income club. If you look at the bottom 99.6% or the bottom 80%, the picture is very different. While the average net worth for the millionaires is $23.5 million, the rest of us have just under $445,000, and the bottom 80% have less than half that.

Even if you assume that all those people making a million or more in income are small business owners (stop laughing now, I’m trying to make a point), where is the evidence that raising income taxes on the wealthy will prevent them from creating jobs? There is no evidence. Here are the facts: Clinton raised the top rate to 39.6% and employment expanded by more than 20% during his presidency, while Bush the Younger lowered top rates and saw only a 2.3% increase in employment during his eight years. This is correlation, not causation, of course, but certainly no evidence for the claim that raising top rates is a job-killer.

Samuelson might appeal to logic, perhaps. But logic must deny the appeal. There is no valid logical argument, merely this: (1) raise taxes; (2) ???; (3) fewer jobs. There is, however, a case to be made in support of raising taxes on those with high incomes. Raising income taxes will increase the incentive to use profits to invest in the business (thereby increasing business-owners’ wealth) rather than as income.  Which one of those options creates more jobs?

More importantly, Samuelson misses the elephant in the room in his discussion of the possible reasons for the increase in inequality over the last 30 years: public policy. Beginning with Ronald Reagan and continuing through Bush the Elder, Clinton, Bush the Younger, and right through to Obama, public policy has shifted more and more toward the benefit of the wealthy. In just about every sphere of public policy that impacts the economy, there has been an almost unilateral shift from policies that help workers to policies that help employers. From agricultural subsidies and embargoes that favor agribusinesses, to free trade policies that help manufacturers to move their plants to the location of the lowest bidder, and labor policies that have enabled the rollback of union power almost everywhere except the public sector itself, the policy landscape has looked ever more appealing to the wealthy and ever more bleak to the worker.

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8 Responses to “Taxing the wealthy will not kill jobs”

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  1. Comment by TylerOctober 24, 2011 at 10:55 am   Reply

    I don’t see the point in raising taxes on the wealthy. It’s not like the federal government will use that extra revenue. As I understand it, the purpose of federal taxes is to destroy money.

    • Comment by Thomas MastersonOctober 24, 2011 at 11:12 am   Reply

      I don’t see tags, so I am assuming you are serious. I am not sure where your understanding of federal taxes comes from. As I have written elsewhere, there does seem to be a profoundly unrealistic idea of what happens to tax revenues: that they somehow disappear. They do not. They are spent: on payroll for government employees; on office supplies; on roads, bridges, schools; on planes and bombs, unfortunately. But destroyed? No.

      • Comment by Clonal Antibody — October 24, 2011 at 2:37 pm   Reply

        Tom

        From Alain Parguez’ 2004 article published in the Intl Journal of Political Economy – A Monetary Theory of Public Finance

        The theory of the monetary circuit brings about the rigorous proof of the Lerner-Wray proposition (Bell 2001; Wray 1998), according to which, since taxes destroy money, they cannot be a source of funds. The state imposes tax liabilities to squeeze the private sector aggregate income and therefore ultimately consumption (a rigorous proof of this ultimate consumption squeeze is to be found in Parguez, 2003). Since taxes cannot generate revenues that fund outlays, the very redistribution doctrine, deemed the “Robin Hood” paradox, is at odds with the existence of money. There is no tax revenue to be redistributed because all the money collected through taxes is instantaneously destroyed.

        • Comment by Thomas MastersonOctober 24, 2011 at 4:59 pm   Reply

          I understand and admit the technical correctness of the point. However, I fail to see the practical application of that to policy discussions. I don’t believe that if we could just get everyone to understand the technical details of Treasury operations we would suddenly break the political deadlock surrounding fiscal policy. Does anyone?
          Stipulating that the mechanics of federal taxation destroys the money that is taxed, the question then becomes whose money shall we destroy? Should we destroy none, since tax revenues and spending are technically unrelated? If not then, whose? My point remains that taxing the wealthy will not cause job decreases.

          • Comment by TylerOctober 24, 2011 at 5:38 pm  

            I think liberals hurt their cause when they press for raising taxes. That has never been a political winner. Imagine if President Obama had the courage to say, “Fine, let’s make the Bush tax cuts permanent. I see no good reason to take money out of the economy. In fact, let’s eliminate the FICA tax. It’s time for the American people to understand how monetary sovereignty works. On that note, I’ll turn the floor over to a distinguished economist from the Levy Institute…”

            Hey, we can dream, can’t we?

          • Comment by Clonal Antibody — October 24, 2011 at 7:26 pm  

            Tyler,

            I am with Tom on this one. I agree with his general premise. I do believe that taxing the rich is the right thing to do, and that politically, this is achievable in the current circumstances. I am also with you on the elimination of FICA.

            In my mind, the major reason for asset bubbles is high incomes coupled with the correspondingly high savings of the rich. The high savings, coupled with financial deregulation has led to asset speculation on the part of the rich seeking high returns. These savings almost never “invest” for the long run, but seek casino like quick rewards.

            There are other reasons for taxing the rich – see the article by Peter Cooper (heteconomist,) – “Debt and Taxes” and my comments there.

  2. Comment by TylerOctober 24, 2011 at 1:45 pm   Reply

    Rodger Mitchell has written the following:

    Federal spending is not related to taxes. This is the fundamental difference between the federal government and state/local governments. It is called Monetary Sovereignty, and it is why our children and our grandchildren never will “pay for” federal deficit spending.

  3. Comment by TylerOctober 24, 2011 at 1:53 pm   Reply

    James Galbraith, 2010: “Today some decry President Obama’s decision to allow the top-tier Bush tax cuts to lapse, arguing that ‘one should not cut spending in a recession.’ And it’s true: jobs will be lost.”

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