Wednesday, December 8, 2010

Should Top Earners Pay Higher Income Taxes?

Dear People in the Top Tax Bracket,

When many liberals look at your incomes, the answer is clear. State and federal governments need money. You have a lot more money than you need to live. Therefore, they should take a higher percentage of money from you, right?

From a practical perspective, that's not bad--an extra percent or two in the top bracket generates a lot more money than a percent or two at the bottom--but it understandably makes many of you top 2% of earners feel a bit like the government has noticed your nice jacket, chased you into a dark alley, and shaken you down at knife point while explaining that they have a bit of a spending addiction and need your help.

From your perspective, it may seem like the United States is built on a clear division of labor: private industry earns the money; the government spends it. You work hard or smart (or else have the foresight to be born with the last name "Walton") and then politicians who are probably too busy text-flirting with teen-aged Congressional pages to do much math blow $3 trillion a year and then announce that they need more of your money. But does anyone ask what you stand to gain from higher taxes?

My friends: fear not. Today, I will try to answer that question. For the first time in the history of the world, I will bother to explain how higher taxes for you top-bracket earners actually benefit you.

But first: let's get to know each other. Let's start with a very personal question: how did you make your money? Maybe you are Bill Gates and before you spent all your time checking this blog for updates, you made a billion dollars by ruling the world of computers (up until Al Gore ruined your near-monopoly by inventing the internet). Or maybe you're way at the bottom end of the top 2% and earn your just over $200 grand a year as a highly successful lawyer or stockbroker or as the owner of a car sales franchise. The again, maybe you're not even in the top 2% yet but you've started your own company making the next big thing and you're pretty sure it will go viral and by next year you'll be crazy rich and so you're worried about top-bracket taxes in advance.

Whatever service you give or product you produce, you are probably very good at it. If you weren't, you probably wouldn't be earning like you are. That makes it easy to think that your special skill--whether it's hard work, intelligence, strong people skills, or having a successful father--is the sole reason for your success. But don't fall into that trap. You don't make money just by being you. You make money if and only if there's a useable outside world to work from.

That is to say: it's hard to sell cars if the government doesn't build roads. It's hard to sell Microsoft Word to every household in countries without public education where the majority of people are illiterate. And it's hard to successfully start your own company in relatively government-free places like Somalia, where everyone's been too busy surviving to develop skills that make them worth hiring, where shoplifters carry automatic weapons, and where it's really not worth it for the average person to venture out of their house to buy your goods anyway.

Successful businesspeople make better products, but they rely on the larger society for quality markets. Take a few moments to estimate the:
a) cost of educating your own laborers from childhood: $______
b) cost of providing the only security for your business operations: $______
c) lost profits from customers without access to your product because of gov't roads, or because a lack of public education makes it useless to them, or who don't buy your product because they or their parents couldn't pay for a medical emergency years ago and they died: $_____
Total: $_____

Now write down the amount you pay in federal and state taxes: $______
Next, multiply the federal part of that number by .13 and add it to the line above. This is your tax amount if the Bush tax cuts expire: $____

It may seem obvious to you based on these two lists that you earn a lot more by operating under a decent government than without a government. So obvious, in fact, that you might think people in your bracket would want to give money to the government whether they were taxed or not. But my dear high-earning friend: do not be fooled. Other high earners, the ones who don't read this blog, are not as philanthropic as you. All businesses have a vested interest in making the market more educated, safer, and healthier, but since the market is so big, most of them won't do it unless everyone solemnly swears to work on the problem together. Many top earners would rather claim that their jet ski purchases stimulate the economy than actually do more to pay for the military, infrastructure, and educated populace they actually depend on.

Let's talk about this in the context of now. If we let the Bush tax cuts for the top 2% of earners expire, each of you goes from paying 35% of your income to paying 39.6% and the government gets an extra $70 billion or so per year. How much is $70 billion? More than enough to pay for the entire Marine Corps ($29 billion per year). More than we spend, even in this age of tracking terrorists, on military intelligence (about $50 billion per year). It's also more than twice the current estimated net cost of TARP ($30 billion), and just over the usual budget of the entire U.S. Department of Education (about $60 billion a year not counting recent stimulus money). Yes: even by government standards, $70 billion a year is real money.

Now, let's imagine that because of the $700 billion less in revenue the government will get thanks to eight-now-turning-into-ten-years of the Bush tax cuts in your bracket, one of these services ultimately gets cut. Have these tax cuts for your bracket really been worth 24 years' worth of Marine Corps funding? Or 14 years' worth of military intelligence? Have they been worth more than 23 bailouts? Go ask the Tea Party about that last one--I'm curious to hear what they think.

Of course, most Tea Partiers would probably say that the real problem with federal spending isn't the Marines and that bailouts are Satanic but rare. They would say instead that the $700 billion the Bush tax cuts for you top earners cost should come out of entitlement programs that only serve to turn losers into whiners. I will not use the same line of argument with you, however, because unlike Tea Partiers, you know that this is silly--thanks to the Social Security Wage Base, everyone in your bracket pays the same $6,621.60 maximum social security tab as someone with a $100,000 a year income, meaning that your social security tax rate is far lower than your cleaning lady's is. (You also know that Medicare is funded by a flat tax, but let's not talk about that too loudly.)

In the end, then, you can't blame the entitlements. And you profit way too much from government-funded services like security, infrastructure, and increased consumer and workforce access to education and health care to be bothered, if you're honest with yourself, by the relatively low prospective 39.6% tax rate that makes a country where people earn what you do possible.

The real question, I suppose, is whether you want people in the future to be able to earn as much as you do. If you think the country should stay safe, strong, and developed enough for the best businesses to have a chance at the success you've seen, you should beg for the $70 billion annually in tax cuts your demographic is getting to end. If you've been aching to see the end of collective American prosperity and supremacy, you should call up your local Republican Senator and offer him a ride on your new jet skis.

And who knows? Maybe you can become the first American multi-millionaire to jet ski all the way to Somalia, and you can start a business while you're there...

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