Wednesday, July 11, 2012

High Taxes Equals Low Growth

President Barack Obama recently announced his intention to preserve the Bush tax cuts for everybody except those who earn 250,000 or more in a year. Republicans, of course, denounced it as class warfare. And a significant number of Democrats argued that while they didn't want to preserve it for the super rich, the ceiling should be raised to 1 million dollars a year.

The political calculus behind it is that average Americans want lower taxes for themselves, but they won't mind people earning a lot of money (I don't want to get into the "250k a year isn't a lot of money in some parts of the country" argument) paying more in taxes. And, if spun the right way, the average American is going to go along with that calculation.

The only issue is there's still a nagging feeling that those taxes are still going to hurt the economy. Republicans launch into the usual rhetoric of class warfare, but they actually have a very good argument if they can spin it the right way.

Let's face facts. America has a rather large wealth disparity. The top 1% of income earners control about 35% of the wealth, and the top 10% controls about 85% of the country's investable assets. But this is precisely why raising taxes on the rich is a bad idea. The Atlantic's Derek Thompson explains why, if unwittingly.

A lot of rich people derive a ton of their assets from investment income. You know, stuff like interest, capital gains, dividends, etc. When taxes rise on the rich, they structure their payments in a way that defers and shelters their income so they can maximize their after tax income (don't act shocked. Regular people do this all the time, just at a much smaller scale).

That usually means parking their wealth in assets that aren't as liquidable. So their wealth isn't as mobile. That hurts the rest of us.

Because so much wealth is concentrated at the top, raising taxes on them will discourage risk taking and encourage wealth preservation. That means you'll see less rich people moving money around trying to chase profits and more rich people parking their money in safe, tax-efficient investment vehicles that don't generate as much economic activity.

The number one concern of voters is the state of the economy and their ability to acquire and keep a job that pays well. To get a job, you need economic activity at the demand and you need an employer that has the capital to employ you. Preventing rich people from easily moving their wealth to chase returns (by investing in businesses or lending to them) prevents a regular person's ability to get a job.

The largest financial market in the world is the American bond market. And the two largest components of the US bond market are corporate bonds and real estate mortgages. Taxes by definition discourage the activity they're taxing. High taxes on the rich will discourage the availability of funds for companies that need money and prospective homeowners who need affordable housing.

It's a much more complicated concept than "YOU'RE INCITING CLASS WARFARE", but arguments are always more complex than rhetoric. My advice to Republicans is to try and argue intelligently and concisely, because while the average American is pretty stupid, they will eventually piece together reality. It's in the best interest of the Republican party and the country to hasten the arrival of that collective epiphany.

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