Why It Would Be a Disaster If We Super Taxed the Super Rich

A recent Gawker article makes the case for a maximum income. In response to confiscatory income tax levels in France, Hamilton Nolan figures we might as well go big or go home. After all, who needs more than $5 million? His proposal is to just cap income at $5 million and use the rest of all generated income for social programs. His argument refers mostly to income inequality and the fact that the super wealthy have an obligation to give back to those less well off.

While I admire his frankness, this idea and the very high tax rates that do the same with less gusto, are unworkable. Here’s why this plan would make your life (and more importantly everyone’s life) suck. It’s a simple thought experiment. Why $5 million? It’s easy to see where this gets messy by asking why Nolan caps it at $5 million. Surely, if no one needs that much, and you could live off the interest alone quite comfortably, the same would be true of $1 million. Or $500,000. Why not give everything we don’t need to the government? The argument goes that the more we turn over, the more gets pumped back to us in a more equitable way. The excess money from my income goes to my neighbor’s sick kid. Your excess income pays for my grandma’s hip replacement. The reason this doesn’t work is because all of those millions are not the same in the hands of the IRS as they are in the hands of the individual. It's not that someone out there needs more than $5 million. It's that much of that “excess” income that goes into the redistributive system never comes out again, or it comes out in ways we never would have chosen. If it all came back out to us, he might as well argue that we give everything over, and just have them give us our fair share back, or buy what we need for us. But he doesn’t propose this, because on some level, we all know that our tax dollars don’t necessarily flow back to us.

There are two issues with using this sort of scheme to address income inequality. Most glaringly, it doesn’t all get spent on the poor or even on people. If you don’t like war, think about how much of this will be used to fund killer-master-extra-death-ray-drones (hint: a lot). Politicians often use increased tax revenue as an excuse to spend more on this type of thing, so remember that the dollars that go in are subject to the whims of those who think the Pentagon’s budget should always be rising. The other issue is productivity. A productive economy needs capital investment. Not so that the investors can get rich, but so that those who receive the loans can start-up and grow productive businesses. Personal savings above what you need to survive is necessarily investment. We know for a fact that’s what rich people do with their money. And we know that they do it in ways most people can’t. Without the high-risk investment made possible by high levels of wealth, we’d see a lot fewer start-ups and a lot less innovation. In the long term, that’s less productivity.

Investment is often what the government does with tax revenue as well. Arguing that all the income taken in taxes will be given out in charitable programs is both incorrect, and a bad idea. As I mentioned, it is investment that allows our economy to continue to produce. If you’re not producing it doesn't matter how much you redistribute, sooner or later, no one will have anything. That’s why I’m more concerned with economic growth, than income inequality. It may not be perfectly fair for some to make $50 million and some to make $20,000, but creating a system where the economy cannot grow is even less fair to those in the bottom of the tax bracket. They're the first to feel the squeeze of a slowing economy as we all saw occur during the most recent recession. Even Marx understood this, arguing that you first needed capitalism to create a sufficient amount of wealth that everyone could have enough to live comfortably without being as hyper-productive as a capitalist society. His argument was that once we reached post-scarcity, we wouldn’t need to be so productive anymore and could enter a communist utopia (with of course the requisite class struggle revolution first). I don’t think we're there yet, and to be frank, I don’t think we can ever reach a post-scarcity society (remember that means we have produced enough that everyone has everything they need forever). That means we can’t have the state give it all away as charity. At least some needs to be reinvested.

So why should we let individuals invest rather than put the money into the state and have our semi-democratic system decide where to invest it? Because individuals (and corporations) invest better. They have no constituents to bow to. No preferred groups to court before the election. No powerful firms they need to give a leg up in order to get campaign funding. More importantly, they don’t suffer from the indecision problems that face all public systems. They also have more local knowledge about various industries and areas. It doesn't matter if the individual doesn't invest it "the best way." All that matters is that they do it better than our lovely little republic would. And they do, every single time. 

We sometimes forget that we can’t legislate desired outcomes. We can’t wave a wand and make that extra income go to poor people. All we can do is have the state confiscate it from individuals and hope and pray that an uncontrollable system, so large that it’s impossible to fully understand, will pump it back out the way that we want. I’m more willing to put my faith in the fact that the wealthy will invest in things that make them money -- that is, investments in companies that prosper -- than that the same politicians who can’t find larges amounts of public money, will invest as prudently.