Why the rich should be taxed

Photo by Michael on Unsplash

There’s one main argument for why the rich should be given money (through tax cuts) and though I do have some gripes with that argument, my main argument for why the rich should be taxed is more philosophical than economical. But first, let’s go over that economic argument.

Trickle Down Economics

Some say that the rich should be given tax cuts, so that with the extra money they can:

• invest further in their business(es)
• hire more people
• invest in other businesses

And that this in turn will cause:

• wages of workers to go up
• the overall economy to expand
• and therefore, that the total taxable money will increase

The basic idea is that if you give money to the rich, this will raise the tide for everyone else, meaning everyone else ends up better. So: give money to the rich and you will also eventually be better for it.

Most economists don’t subscribe to this theory anymore cause empirically there’s no substantial proof that it works. If anything, the evidence shows that tax rates (cuts or raises) don’t seem to have a substantial correlation on things like income, wage, economic, or job growth.

Compares the top income tax rate (on the left) and the real GDP growth (on the right) from 1950–2000 (on the bottom) http://www.faireconomy.org/trickle_down_economics_four_reasons

So in all honesty, there isn’t great evidence to say that one way (lower or higher taxes) leads to a better economy. Then what should we do about taxes? From a more philosophical standpoint, I think that the rich should generally be taxed higher.

“No Man Is An Island” — John Donne

No man is an island entire of itself; every man 
is a piece of the continent, a part of the main; 
if a clod be washed away by the sea, Europe 
is the less, as well as if a promontory were, as 
well as any manner of thy friends or of thine 
own were; any man's death diminishes me, 
because I am involved in mankind. 
And therefore never send to know for whom 
the bell tolls; it tolls for thee.

As a wealthy individual, the question should come down to: “Did I accomplish this — did I become this wealthy — on my own?”

We like to idealize the “self-made man”, the person who worked really hard to become the wealthy person they are. But as of late, that idea holds no water for me anymore.

Luck & Circumstance

The first time this idea started to shatter for me was while reading Outliers by Malcolm Gladwell. He talks about how when and where you were born, your circumstances, plays a significant role in certain kinds of success.

• professional sports players have a high correlation of being born in the 1st quarter of the year: because they were bigger & stronger than their age-group peers, those small advantages they had when they were young, due solely on when they were born within a year, accrued into a higher chance of making it pro.
• Steve Jobs & Bill Gates: both born in the same year; both born within the vicinity of one of the first few publicly available computers nationwide.

A point being made here is that, as with the athletes, small advantages, or your circumstances, early in life lead to large variances later in life. Things like, did you…

• not have to worry about having a roof over your head?
• not have to worry about having food on the table?
• have a father figure or good role models in your life?
• have quick & easy access to education? good quality education? good educators?
• have a good conducive learning environment?

If someone had to deal with any one (or all) of these “circumstances”, they would have a harder time achieving success than those who didn’t. This helps to explain why something as simple as “access to preschool” is one of the most cost-effective ways of improving our educational system.

The second is Guy Raz’ podcast, How I Built This, and his persistence in asking a question to his interviewees along the lines of, “How much of your success do you attribute to hard work and luck?”

The vast majority of them attribute a large portion of their success to luck, that they were in the right place, at the right time, or knew the right person. It definitely doesn’t discount their hard work, but hard work is just table stakes.

So that’s one reason that I believe a rich person should be taxed, because much of an individual’s success in this world can be largely attributed to luck and/or one’s circumstances. That again, table stakes is hard work, but it’s also a lot of other factors that leads one to be wealthier than others.

“[M]uch of an individual’s success in this world can be largely attributed to luck and/or one’s circumstances.”

Wealth: a product of society, not apart from it

That leads to my main point on why the wealthy should be taxed: we’re not alone in this world. We live together. A person cannot become wealthy without others. Other people working for them or other people buying their goods. If we didn’t live in a society interdependent on one another, particularly in this globalized context, than our .1% could not achieve the wealth that they have.

In a sense, my point can be summarized into this:

1. the wealthy are only able to achieve their wealth because of the society they are a part of.
2. a large part of how they were “chosen” to be one of the wealthy is due more to luck & circumstances than it is their hard work.
3. hence, as a product of that society, they have the responsibility to give back to those who didn’t have the same luck & circumstances as they had.

Therefore, my preferred economy would be compassionate capitalism. What capitalism is really great at is driving innovation by pitting people against one another to become one of the few who succeed. So capitalism drives innovation, but pure capitalism would also abandon 90%+ of the population (think of the robber barons of the 20th century). But if the 1% then decided to provide a minimum standard of living and happiness (had compassion), then that would be an economy I could stand behind.

Some (related) statements of opinion

• I believe that our corporate tax rates should be lower (in the range of a 20–25% effective tax rate; in 2012, U.S. corporations had an average 29% effective tax rate)
• But in tandem, I also believe that our individual tax rates should be higher, in a highly progressive fashion
• Also a supporter of the estate tax: would probably support higher rates, but perhaps also a little higher exemption
• But, we need to destroy tax havens and make anonymous corporations illegal (it’s actually legally unethical for corporations to not look for tax loopholes, so we need to get rid of them)
• We also need to create some punitive action for corporations choosing to leave the U.S., while still conducting most of their business here.
• Create tax incentives for actual small businesses (small in revenue), not for “pass-through entities”, which are just businesses with a “small” number of owners! (incentives for “pass-through entities” would largely benefit the wealthy)
• We should be very vigilant about constantly regulating our business community, but in a wise manner and with an emphasis on lowering the regulatory burden where possible
• We need to try and make our government run better instead of trying to dismantle it; as inefficient as bureaucracy is (at least until technology can supplement more efficient processes), our government is still a better vehicle to serve the entire population, including all niches, than privatization or philanthropy would be (though privatization is better when serving smaller/niche groups of people)
• I don’t believe in a society of economic equals, but I do believe that when a country is wealthy enough, it should provide ample opportunities for all citizens to achieve a minimum standard of living —or as the Declaration of Independence aptly says, “Life, Liberty, and the pursuit of Happiness”