Tax the Rich for the Social Good

Matt Yglesias“But would that be so bad?” Matt Yglesias asked that question about the effect of very high marginal taxes on very high incomes. So CEOs retire earlier than they normally would? So celebrity lawyers leave the field early and take up a hobby? So movie stars stop making action films and take small projects with roles more in tune with why they became actors in the first place? The horror!

This afternoon, Yglesias published what may be the best thing I’ve ever read by him, Beyond the Laffer Curve—the Case for Confiscatory Taxation. For those of you who don’t know it, the Laffer Curve is a theoretical idea that increasing taxes will only increase revenues so far. If the government raised the top tax bracket to 99%, the rich would figure out ways to avoid taxes. And even if they didn’t, the theory goes, the rich wouldn’t work as hard and we would all suffer. Here it is:

Laffer Curve

One thing is clear about the Laffer Curve: our current tax rates are far far far below the equilibrium point. So the truth is that we could raise taxes for the sole purpose of raising revenues. And we could do it a lot We have a long way to go. But that isn’t Yglesias’ point. Certainly he knows that higher marginal tax rates would improve government balance sheets. But tax rates are not always about raising revenues:

Maybe at least some taxes should be really high. Maybe even really really high. So high as to [be] useless for revenue-raising purposes—but powerful for achieving other ends.

We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. And since cigarettes are about the most-taxed thing in America, we certainly would want to cut out all our other anti-smoking initiatives. But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.

His point is that income inequality is so bad that we ought to create taxes to address the problem, just as we did with cigarettes. It will probably come as no surprise to all of you that I totally agree with him. The truth is that without a decent amount of income equality we cannot have democracy. It isn’t just me; the only unquestionably great Found Father, Thomas Paine, was deeply interested in the issue. And surely, the recent Princeton study should make it clear to anyone who isn’t completely closed minded.

Yglesias makes another great point about this. If we taxed incomes over $10 million at 90%, corporations would have incentives to pay lower level employees more. And certainly, taxes could be set up to facilitate this even more. The way we have set up our political economy is such that it tends to create winner-take-all markets. I know that conservatives think this is because that is the “natural” and “proper” outcome of markets. But it is actually just the result of society’s winners manipulating our laws to their advantage.

The only problem with Yglesias’ idea is that the rich have all kinds of incentives to find ways around these restrictions. But generally, such loopholes are put into the law because the law is created by these very same rich people. If we had a true democratic process, we would doubtless have better laws. And as loopholes showed up, we could fix them. All we need is a democracy.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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