Why We Should Fear Lower Taxes on the Rich

Millions of Americans have seen corporate execs routinely outsource and downsize, slash wages and attack pensions, cheat consumers and fix prices. Study: Taxing them more reduces this behavior.

By Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, How Much Should The Rich Pay in Taxes? Tax Justice Focus, Third Quarter 2012 issue, TooMuchOnLine.ORG

Economists Thomas Piketty and Emmanuel Saez have emerged over recent years as the world’s most respected authorities on income concentration. No one has generated better historical data on the incomes of America’s super rich.

But Piketty and Saez haven’t done much work, for the general public, on the impact of top-heavy income distributions on our daily economic lives.

That has just changed. The Paris-based Piketty and Saez, a University of California at Berkeley scholar, have just joined with MIT’s Stefanie Stantcheva on a brief article that helps explain why raising taxes on a nation’s rich creates economies that work for everyone, not just the wealthy.

Piketty and his colleagues begin their new piece in the most recent edition of the Tax Justice Focus quarterly by noting a simple, amply documented reality: In nations that have significantly lowered tax rates on high incomes, the rich have significantly increased their share of national income.

Since the 1970s in the United States, the tax rate on income over $400,000 has dropped from 70 to 35 percent. Over that same span, households in America’s top 1 percent have over doubled their national income share, to 20 percent.

In Europe and Japan, by contrast, tax rates on the rich have dropped much more slowly and top 1 percent income shares have increased “only modestly.”

Conservatives have an explanation for these numbers. High tax rates on high incomes, they claim, discourage entrepreneurs. Lowering high rates, the claim continues, encourages them. Entrepreneurs who can keep more of their income go on to invest in their economy, create jobs, and make everybody happier.

In the bigger economy these lightly taxed entrepreneurs build for us, conservatives freely admit, the rich will make plenty of money and even increase their income share. But the rest of us shouldn’t mind any of this at all. Thanks to the rich, they argue, we get to live in larger, more buoyant economies.

In their new Tax Justice Focus paper, Piketty, Saez, and Stantcheva put these claims to the test. If the conservative argument reflected reality, they note, nations that have cut tax rates on the rich substantially should show much higher economic growth rates than nations that still levy stiff taxes on their richest.

In fact, the three economists point out, reality tells no such story. Nations that have “made large cuts in top tax rates such as the United Kingdom or the United States,” they detail, “have not grown significantly faster than countries that did not, such as Germany or Denmark.”

So what’s going on in countries where the rich all of sudden face substantially smaller tax bills?

In these countries, Piketty and his colleagues posit, top executives don’t suddenly — and magically — become more “productive.” They suddenly instead find themselves with a huge incentive to game the system, to squeeze out of the companies they run all the personal profit their power enables them to squeeze.

The more these executives can squeeze, in countries that have sheared tax rates on the rich, the more they can keep. The result? The top 1 percent in nations that go easy on the wealthy at tax time proceed, as Piketty and his fellow authors put it, to “grab at the expense of the remaining 99 percent.”

The three authors don’t go into chapter and verse on this grabbing in their new paper. They don’t need to. Millions of Americans already know this grabbing behavior first-hand. They’ve seen corporate execs routinely outsource and downsize, slash wages and attack pensions, cheat consumers and fix prices.

How can we start discouraging these sorts of corporate executive behaviors? Piketty, Saez, and Stantcheva have a straightforward suggestion: raise taxes on America’s highest-income bracket, raise them as high as 83 percent.

This suggestion, the three acknowledge, may now seem politically “unthinkable.” But back between the 1940s and the 1970s, they point out, the notion that we ought to raise taxes on the rich to reduce the incentive for outrageous behavior rated as the conventional wisdom in the United States.

In those years, “policy makers and public opinion” felt strongly that pay increases at the nation’s economic summit “reflected mostly greed or other socially wasteful activities rather than productive work effort.”

Is this perception about pay at the top now about to make a comeback? Piketty and his fellow researchers certainly think so, and they see in the Occupy movement signs of a shifting public perspective on the wealth of the wealthy.

Economists ought to be speeding this shift “with compelling theoretical and empirical analysis,” add Piketty, Saez, and Stantcheva in a hopeful final note.

Mister Romney versus President Obama in 2012 (My first campaign video [posted at YouTube. Forward to the DNC)