The 70% solution

By J. Bradford DeLong
November 30, 2011

By J. Bradford DeLong
The opinions expressed are his own.

Via a circuitous Internet chain – Paul Krugman of Princeton University quoting Mark Thoma of the University of Oregon reading the Journal of Economic Perspectives – I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.

It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.

The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.

From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.

The utilitarian economic logic is clear. Yet more than half of us are likely to reject the conclusion reached by Diamond and Saez. We feel that there is something wrong with taxing our superrich until the pips squeak so much that further taxation reduces the number of pips. And we feel this for two reasons, both of them set out more than two centuries ago by Adam Smith – not in his most famous work, The Wealth of Nations, but in his far less discussed book The Theory of Moral Sentiments.

The first reason applies to the idle rich. According to Smith:

A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations …

We feel this, Smith believes, because we naturally sympathize with others (if he were writing today, he would surely invoke “mirror neurons”). And the more pleasant our thoughts about individuals or groups are, the more we tend to sympathize with them. The fact that the lifestyles of the rich and famous “seem almost the abstract idea of a perfect and happy state” leads us to “pity…that anything should spoil and corrupt so agreeable a situation! We could even wish them immortal … ”

The second reason applies to the hard-working rich, the type of person who:

devotes himself forever to the pursuit of wealth and greatness…With the most unrelenting industry he labors night and day….serves those whom he hates, and is obsequious to those whom he despises….[I]n the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments….he begins at last to find that wealth and greatness are mere trinkets of frivolous utility….Power and riches….keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death…

In short, on the one hand, we don’t wish to disrupt the perfect felicity of the lifestyles of the rich and famous; on the other hand, we don’t wish to add to the burdens of those who have spent their most precious possession – their time and energy – pursuing baubles. These two arguments are not consistent, but that does not matter. They both have a purchase on our thinking.

Unlike today’s public-finance economists, Smith understood that we are not rational utilitarian calculators. Indeed, that is why we have collectively done a very bad job so far in dealing with the enormous rise in inequality between the industrial middle class and the plutocratic superrich that we have witnessed in the last generation.

26 comments

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Raising the top income tax rate to 70% wouldn’t hurt the “plutocratic superrich”, most of whose money comes from capital gains. Instead, it would hurt the ‘working rich’ — physicians, high-end salesmen, entrepreneurs, and others trying to amass wealth.

It also wouldn’t do much to ameliorate the rise in inequality between the “industrial middle class” and the superrich. That inequality has been driven primarily by the offshoring of industry, combined with liberal immigration policies that have increased the supply of labor and lowered its price (wages) by a process known as supply and demand.

If you want to tax the supperrich, the most effective way to do that would be via a wealth tax — the editors of the FT recently proposed one of 0.5% per year. Levy that on those with assets over a certain threshold ($10 million?), and levy it on foundations as well.

If you want to reduce inequality, tackle that via trade and immigration policy. Stop flooding the labor market with new job seekers from elsewhere, and encourage the reshoring of good-paying industrial jobs.

Posted by Dave_Pinsen | Report as abusive

I will second the “WTF??”

Posted by sunnyman | Report as abusive

pretty meaningless, unless you are willing to tell us what income level qualifies as “superrich”

is it $250k?, $2.5M? $25M..?

Posted by jgf | Report as abusive

The politics of envy are alive and well and living with the American left. Sure you can tax them and then they would simply move overseas as Jim Rogers has done.

But here is another statistic to show how pointless this line of reasoning is. Gates and Buffet’s total wealth would fund the Federal government for about a month.

If you confiscated all the earnings (100% tax) of the top 400 wealthiest listed on Forbes it would fund the Federal government for about eleven and a half months.

The demands of the Feds are so huge that no amount of taxing of the wealthy will make even a tiny dent in the problem.

But, of course, the politics of envy has always been short on rational thought and long on emotion.

Posted by eleno | Report as abusive

Your thinking is refreshing and honest. Just the ideas you are suggesting we only consider are running straight into a tsunami of propaganda that is teaching us to think in these simple term: Those who are wealthy earned it and every effort within the power of our government should be made to help them further increase their wealth. Everyone else, on the other hand, are comparatively lazy and are obviously doing something wrong. Those people, roughly 99% of us, do not deserve any help from the government because, unlike the top 1%, the 99% haven’t earned our government’s help and should actually be looked down upon. It’s amazing and bazaar, not to mention deleterious to the greater good of our nation.

For starters, I resent this push to suffuse our culture with the belief that wealth is the preeminent standard on which to judge one another. This is particularly ironic in that it’s a belief being perpetuated by the Republican Party, the Party that likes to consider itself representative of Christian family values. And nothing could be further from the truth. This is exactly the kind of thinking that Jesus was trying to overturn.

I’m afraid the GOP is only going to manage to divide this country, and so far they’ve been doing an excellent job. And when anyone of the 99% question what is being instilled in us, they are immediately charged with aggravating “class warfare”. Ironic, isn’t it?

Posted by doggydaddy | Report as abusive

Doubling the current effective rate from 17% to 34% would seem like a sufficient increase, particularly if the 47% who supposedly pay no income tax paid 10-15%.

Posted by SanPa | Report as abusive

Hear, hear!!!

Posted by w.burton | Report as abusive

Even if you accept the idea that the wealthy have no use for their money, I cannot imagine anyone voluntarily living in a nation in which 70% of their wealth is confiscated. Besides, this argument does not even take into account the implications such policies would have from a deontological, as opposed to a utilitarian, standpoint.

Posted by Sewblon | Report as abusive

For the super rich, any thing above their mansion, expensive car, a small jet or two, extra rich-with-good- calories food, and their dogs and cats, plus a fat monthly check from welfare (all of this just to keep them happy and hopefully productive), should be totally nationalized. How about that?

Posted by OmarMinyawi | Report as abusive

Well said !

Posted by American213 | Report as abusive

eleno: I’m curious about something. There are many possible reasons why someone would support raising taxes on the wealthy. Admittedly, class envy is one of them. I’m sure there are people who are lazy, envy the rich for having what they, themselves, can’t afford, so they want to see taxes go up on the wealthy.

But there are other possible reasons, like believing that current tax policy is unfair because a small segment of the population is increasing their wealth significantly when the vast majority of people cannot afford to pay more in taxes and therefore, since running our country requires money, the wealthy should pay a greater portion of their earnings in taxes.

There are some, millions actually, who live on fixed incomes who see the cost of living increasing significantly year after year without any relief in sight. In fact, most of the talk coming from our government involves cutting back on all programs that those of lesser means depend upon. Certainly you wouldn’t want to mistake need for envy. I just can’t imagine many of America’s elderly are sitting around pining away longing for the lifestyles of the rich and famous. More likely they are just focused on survival and would be more than grateful if they could just know that their basic necessities would continue to be met.

And there are many millionaires who agree that they should be paying more in taxes. Warren Buffet just happens to be the best known. In fact, the WSJ recently reported that 68% of millionaires agree that their taxes should go up: (http://blogs.wsj.com/wealth/2011/10/27/ most-millionaires-support-warren-buffett s-tax-on-the-rich/) Obviously this position has nothing to do with class envy, because these are people who already have everything money can buy.

So here’s my question: Judging from your post, why do you assume that those who believe that taxes on the rich should rise do so out of envy? Where is your evidence? Are you possibly confusing opinion with evidence? Are you just assuming that if someone thinks taxes should rise on the rich that it can only be because they are envious of the rich? Since a majority of Americans believe that the rich should pay more in taxes, do you really have such a low opinion of Americans?

Supposing a typical Middle Class family is pulling down $48,000 a year. They are making the typical monthly payments, but are finding it more and more difficult to keep up because their income isn’t increasing but every year the cost of living is. They see cuts being made to public education continuously. Perhaps their parents are on Medicare and living on Social Security and they worry that cuts will have to be made to these programs. They see the US cease to tackle the kinds of projects that once made our country great, like our space program, the Hoover Dam, Eisenhower’s Interstate Highway System, or the Panama Canal. Heck, we don’t adequately maintain what we’ve got now, like our electrical grid and much of our infrastructure.

Why isn’t it possible that this family believes that the US would be better off if the wealthy, whose wealth continues to aggregate with each passing year and, frankly, wouldn’t miss the difference paid in increased taxes anyway, were to pay more in taxes, particularly since a majority of the wealthy agree with this family? Why make the less likely assumption that it’s all about class envy, when really all they want is what’s best for their family and their country? Or to look at it another way, if a majority of Middle Class Americans believe that the rich should pay more in taxes and a majority of the rich believe they should pay more in taxes, why shouldn’t the government raise taxes on the rich? Isn’t that a no-brainer?

And BTW, Jim Rogers, former partner of George Soros, moved to Singapore because he believe it’s easier to make money in Asia and that the US is in economic decline, not because the US taxes too much. He only cares about money, and obviously lacks any patriotism. Of course, that’s his prerogative. Income taxes have been as high as 92% on the affluent here in the US and we did just fine. There was no mass exodus of rich people leaving the country.

Bottom line is, in order for our country to thrive we have to raise taxes. If you feel that having a small number of people amassing tremendous amounts of wealth is a higher priority than seeing our country thrive as well as maintain the strongest military force in the world, then you’ll want to stick with the line that the rich should pay less in taxes. That’s certainly your right. But I think it’s self-belittling to assume that those of us who believe otherwise do so purely out of class envy. Just something to think about, but you’d actually have to think about it to reach any greater understanding.

Posted by doggydaddy | Report as abusive

A well managed economy is not described by the opportunity of those who will to accumulate all the wealth of a nation. It’s described by the circulation of wealth through the hands of all the members of the populace. Consumption is not the byword of a well tempered society but circulation.
Accumulation is not a moral and admirable trait and has been condemned by the meanest pygmy tribes of the Iturbe Forests.
But these readers of Reuters Thought are made of sterner stuff and reject these effete Christian Mores extolling the virtues of sharing. So,…I will draw from a battle of wills more to the character of these fearless readers: the World Poker Championship!

When one guy has all the chips, the game is over,….

Posted by blue7053 | Report as abusive

This is silly…
Just bring the tax rates on the super rich up to where it was in the 90′s…Get rid of the big corporate subsidies… Concentrate any new tax breaks on emerging small businesses and…… instead of taxing companies on how many employees that have…How about taxing them what and how much they process… Tax Evey bank – to – bank transaction that has nothing to do with customers… even the smallest percentage of that could easily bring our country out of debt.

Posted by Tracy--lee | Report as abusive

I agree that a progressive income tax has worked in the past and would likely work again. I understand “unsustainable” when comparing current government spending and current government revenue. I also understand that there is a “best time” for each type of tinkering.

Our congressional representatives in the last sixty years have never seriously tried to keep government spending in balance with government revenue…i.e.to “live within our means”. But it IS the job we elect them to do.

There needs to be a national dialogue and decision as to what kind of country this is to be in the future. That dialogue will likely take place in the chaos running up to our next congressional/presidential election. Those elected will put the decision of the electorate into action.

What needs to emerge is some consensus as to the legitimate purpose of government, because the purpose directly relates to the size of government. I, personally, would like to see about half of our bloated yet ineffectual “alphabet agencies” abolished, and those like the SEC and the FDA given adequate funding and held accountable for fulfilling their obligation to the American people. But timing is also critical.

I believe the current “payroll tax cuts” are a REALLY bad idea because they adversely impact an already deficient revenue stream from Social Security and unemployment funds, but I agree that this money does immediately flow into our economy and bounce several times. I believe the current extension of unemployment benefits beyond 26 weeks (six months) creates an incentive for those working at or near minimum wage to stay home and watch TV, etc.; yet, again this money IS needed out in the current economy bouncing around. Instead of extending unemployment, I would like to see “CCC” type employment and/or trades instruction so that these unemployed will, in time, have new skills to offer in the marketplace that are needed. If funded at a similar rate, I think the shift in emphasis would be an improvement over the “status quo” and as economically “stimulating”.

As far as increasing taxition on the rich, I believe giving congress more general revenue at a time that they seem incapable of keeping proper account of the present staggering amounts they keep shoveling out is like trying to put out a fire with gasoline. So, if we do this, the added revenue should NOT go into the general fund, but should be solely dedicated to paying down our national debt while we simultaneously move to QUIT raising the debt ceiling constantly and immediately spending the new “credit”!

These are all organizational and tactical moves that can be implemented without regard to those inconvenient specifics that, sooner or later, this country is going to have to address in a timely and meaningful manner.

Posted by OneOfTheSheep | Report as abusive

Mr. J. Bradford DeLong, your poetic piece has struck a chord with me. I especially like the idea of calculating the tax rate with supply-demand price theory. And your explanation of the emotional reasoning behind our denial of this obvious logic is as beautiful as it is bittersweet. But your real triumph is that those who would argue with you attack Saez and Diamond’s conclusion, but not your observation. Brilliant insight and a pleasure to read. Thank you.

Posted by LEEDAP | Report as abusive

As T. Boone Pickens once said, and I paraphrase: “How many jets do you really need.”

Posted by OFA7 | Report as abusive

A 70% marginal tax rate at what marginal income level? $250k? $1,000,000? $10,000,000? All a 70% tax rate does is prevent anyone from getting rich and preserves th existing rich who will hide their wealth from the tax man.

Why is that lost on our economic experts. Tax rates based on happiness and utility…wow.

Posted by rfam | Report as abusive

Well said Mr OneOfTheSheep! Higher taxation applied to debt is fine, but the organic problem is out of control spending not lack of revenue.

A secondary problem is the willy-nilly tweaks and twitches of the rules and regulations American businesses operate under. Less than a month away from a new payroll year and nobody has a clue what the 2012 withholding tables are going to look like.

Even bad rules, consistently enforced are better than the Feds constantly jerking the steering wheel and then changing their minds, “Let’s go here, let’s go there”.

It’s wasteful and counterproductive. If we are to survive and prosper we need a solid plan, and we need to stick to it.

Posted by CaptnCrunch | Report as abusive

The thoughts and concepts presented are specious. The fundamental thesis of this article is that the Federal government must be sustained at all costs regardless of their blatant and unctuous behavior, fiscal mismanagement and complete lack of fiduciary responsibilities to the american citizen. Sure tax the richest better yet put a consumption tax on their so called toys; but does that really solve the problem. I think not! The federal government has always had a systemic nefarious problem one of mismanagement. Mind you I am not a Republican or a Democrat but an individual who immigrated here with his parents because this WAS the land of opportunity. Of course there is inequality in the world which has existed form the dawn of time and is a blinding view of the obvious. The pernicious and feckless behavior of our government and their obdurate position except come election time is a travesty. I will not bore you any further with my pontification but will leave you with the thought that the Federal Government should take a close look at itself before it asks the american taxpayer to belly up to the bar for higher taxes.

Posted by niejelow | Report as abusive

I think we are all going to have to pay more in taxes, no matter the income. And health care expenditures must be reined in. End of life care is exorbitant, wasteful and many times cruel, putting our elderly loved ones through procedures they don’t benefit from, but the health care industry makes fortunes out of. Attack the problem from both sides, more revenue and decreased spending. Cut the wars in the Middle East and all subsidies to oil companies and agriculture conglomerates. That would be a good start. The rich should pay their fair share, with no loopholes, but 70 percent is too much for them as it would be for the rest of us. Don’t forget to regulate Wall Street back into the investment apparatus it was meant to be, not just some trumped up gambling scheme that inflates prices around the globe and then dumps them.

Posted by lhathaway | Report as abusive

Delong’s article confuses the difference between an “income”-based tax and a “wealth”-based tax.

Income tax = you pay based on (annual/periodic) earnings
Wealth tax = you pay based on ownership (property, stocks etc)

Moreover, is he advocating maximizing revenue to the government (income tax receipts at the Laffer curve peak) or maximizing the “well being” (a squishy term) of the “rest of us” by taxing the (evil) “super rich” sufficiently.

In either case, as noted by others, setting a national property (wealth) tax to 100% and the national+state+local income taxes to 100% on the richest Americans will not fund the US government for more than a few months to a few years.

After that, the super rich will be part of “the rest of us” and who will fund the spending orgy? The parasite-moocher class can only get their pound of flesh once.

Posted by timstevens | Report as abusive

Very well said @OneOfTheSheep. I don’t think any of it will come to pass until we have term limits for congress and campaign finance reform though. Absolutely nothing significant will happen until those two things are.

Posted by tmc | Report as abusive

Assume that higher taxes do not make the rich unhappy. So what? Whether someone is made happier or not does not seem a sound basis for public policy – to say nothing of the sad state of affairs if someone’s personal happiness is wrapped up in public policy. A majority of Americans think the rich (undefined) should be taxed more? That is the functional equivalent of asking “Should someone else other than you pay more taxes?” The answer to that question is not worth very much.

Posted by SayHey | Report as abusive

The tax rates on the wealthy can be raised to whatever level you want them to be and the economic condition of the country nor the financial well being of the nation will be improved by any significant measure. Congress and the demands of their constituents will funnel money into every black hole that exists without reducing deficit spending nor making a dent on the national debt. As we have nearly defined everything as a right, the government will never, ever have enough money. Don’t tell me about Clinton’s balanced budget, that was a one time flash in the pan due to the Y2K technology rush that will never be seen again. Beside, he had a Republican House working with him.

Posted by Gmoney321 | Report as abusive

Much of the problem is simple arithmetic, and an absence of understanding when debt was incurred, and a lack of asking the rich to sacrifice ANYTHING.

1) Fact is, the GOP cut taxes when times were good, and forced it through at that using reconciliation, because Democrats argued (rightly!) at the time that it would bust the budget if the cuts were not allowed to expire. What a surprise, it did bust the budget – AND we had an economic collapse on top of it. And the GOP argued AGAINST letting them expire on time – again, a budget-buster. Deficit hawks? Hardly. More like haters of any social programs, which leads me to my next point…

2) Social programs are now being asked to have cuts applied. “Cut SS! Cut Medicare!” You can read it in the comments here: “Spending is the problem! Not revenue!” What these simpletons have not learned from watching FAKE News is that revenue IS down – from 21% in 2001 to 14% now. Remember, taxes on the rich were higher in 2001, AND the economy was better. Add two wars, an unpaid for Medicare Part D (GOP passed!) and an economic collapse, what do you THINK the result would be? The Laffer Curve is a joke; lowering taxes forever does not magically increase revenue.

3) The rich haven’t been asked for ANY sacrifice. The poor and middle classes? Oh yeah. Go to war. Pay more for food / gas / energy / health insurance. Cut Medicare, cut SS, cut Medicaid, and more. The rich pay more taxes as a small sacrifice? Nope. In decades past, we asked ALL of our country to sacrifice when we went to war; in the conservative mind of today, asking ANY sacrifice of the rich to pay for the wars THEY started – well, now magically that is a bridge too far. Socialize the losses, privatize the gains.

Welcome to the world owned and run by the 1%. Any wonder we have Occupiers?

Posted by Dave123456 | Report as abusive

Obama has accomplished one thing…Class Warfare is alive and well. He was going to bring us all together remember? Wealthy people work hard, long hours for what they have, many have reloacted their families several times to move upthe ladder. They should be rewarded.

DON’T HATE EMULATE

Posted by CECUMMINGS | Report as abusive