#96 Tax the Rich

The Christian Economist

#96 Tax the Rich

The rich already pay a high percentage of income taxes.  Taxing them more will cause them to leave the country.  And, it denies the consumer surplus that was created to earn wealth.

The Socialist Alexandria Ocazio Cortez is so famous she is typically referred to as AOC, and everyone knows who you’re talking about.  Frankly, I think she gets so much news coverage because she’s a “Man Bites Dog” story, but that’s not my topic today.  My topic is engendered by a dress she wore to the Met Gala recently with the message “Tax the Rich” on the back.  Ok, let’s think about this. 

Who is rich?

Let’s assume AOC is a global Socialist.  That makes good sense.  If she’s making a moral argument, why would morals stop at the border?  So if she “Would like to teach the world to sing,” as the old Coca-Cola ad suggested, she would want all the rich of the world to be taxed.  Only problem is, the average family income worldwide is about $10,000.  So a family making $11,000 is rich?  After receiving government transfers, every American family makes more than that.  So if she’s a global socialist, her message is “Every American family should be taxed, because they are all rich.”  But if everyone is rich, then no one is poor.  In America, that’s pretty close to the truth.  I unpack more details in podcast #9 The Poor Will NOT Always be With You. 

OK, since we’re moving along the logic chain, let’s assume maybe she’s not a global Socialist, but a National Socialist.  I’ll allow you to find what that party was called just a half-century ago.  So, she either favors taxing every American family, or she’s a National Socialist.   

Oh my goodness.  President Biden came out with this old phrase again this week, “The rich should pay their fair share.”  Should I waste my scarce podcast time on this?  I just performed this exercise in class this week.  I ask the student groups to estimate what percentage of total income taxes are paid by the five quintiles of American families, from the richest one-fifth to the poorest one-fifth.  I’ve been doing this for many years.  The students generally guess that the top 20% of income earners pay about 40% of income taxes.  They are astounded, literally, there are gasps in the room, when I write the real number: 87%.  The top quintile of income earners pay 87% of the total income taxes paid.  The next quintile pays 11%.  Hold it: I’m at 98% and I’ve only counted two of the five quintiles.  The third pays 5%.  If you’re following the math, I’m at 103%.  That’s because the fourth pays -1% and the bottom pays -2% because of earned income credit.  

So, missing from this “Fair Share” comment from President Biden this week is an answer to the question, “What is fair?”  Phil Gramm and John Early, writing in the Wall Street Journal in early 2020 state clearly, The claim that rich Americans pay a smaller share of their income in taxes than any other households is verifiably false.

They point out that after government transfers, the top 1% makes 18 times as much as the bottom quintile but pays 219 times as much in taxes.  I could state many other data points.  But just one more: They state that the US has THE MOST progressive taxing system in the world.  And OAC wants to make it MORE progressive.  What are the results of higher taxes?

In Atlas Shrugged, Ayn Rand told a story about people “shrugging.”  If I taxed the rich grades of my high-performing students, they would change to a class where a professor did not tax them.  I’ve offered that, by the way, to about 5000 students in 30 years of teaching.  Even though I have “Grade rich” students in every class who earn A’,s and “Grade poor” students who flunk.  No student has offered to give any part of his or her grade to a failing student.  Yet.  The statistics on that are amazing.  The media claims that 65 to 75% of college students would vote for a Socialist, but when offered to practice socialism in the classroom, I am 0 for 5000.  

This “shrugging” really does take place.  Former Governor Cuomo of New York said, “People vote with their feet.”  Fascinating: He was complaining that rich people were moving out of New York state because of the high taxes HE imposed!  Arthur Laffer wrote a book titled An Inquiry into the Nature and Causes of the Wealth of States.  The short title is The Wealth of States.  You’ve probably figured out that he got that title from Adam Smith, they guy looking over my shoulder today.  It explains how a 50-state economics experiment is continually being run in the United States.  Or simply: California will lose population this year for the first time in history.   My sophomores know why.   Californians are shrugging, and moving to places with no state income tax like Texas and Florida.

I asked the students last week, “IKEA is from what country?”  They are so proud to know that it’s a Swedish company.  You’ve probably noticed, they even give the Swedish name for pillows and beds.  “Then why did the founder of IKEA, Ingvar Kamprad, not live there?  Answer: He shrugged at Sweden’s high tax rate.  When I worked in pro tennis, Bjorn Borg of Sweden was the top-ranked player during that time, but he didn’t live in Sweden.  He lived in Monaco where there Is no income tax.

So the headline in this week’s business press reads something like, “Democrats Outline Their Plan for New Taxes,” but my sophomores at Dallas Baptist University know that the headline should read, “Thousands of Wealthy Americans Plan to Shrug Because of High Taxes.”  

The previously mentioned Arthur Laffer is famous for explaining this “shrugging” on a napkin and it became known as the Laffer Curve.  Of course, it’s been attacked by Socialists, but if you just give it 30 seconds of examination, it makes sense.  The government gets zero tax revenue with a zero tax rate and zero tax revenue at the 100% rate.  There has to be a hump, the only question is where.  An Obama economic advisor, Christina Romer, determined it was 35%.  

Marxism

Back to that dress.  The message “Tax the Rich” is Marxist.  Karl Marx claimed there are two groups: The  oppressors and the oppressed.  He said that the oppressed much rise up and throw off the oppressors.  Those of us who had to read Animal Farm in high school knows what happens next.  It’s the total opposite of e pluribus unum.  It’s e pluribus pluribus.  And, it’s clearly covetousness.  Interesting: How many media outlets do you think carried the headline, “AOC wears dress with covetous message?”  Think about it.    

Lots of conservative loud-mouths are citing the hypocrisy of AOC showing up at a $3,000 a ticket gala wearing a $2,000 dress with the message, “Tax the rich.”  I’ll let them make that claim.  I’ll just call it a violation of the eighth and tenth commandments, since I’m speaking to an audience who knows the Bible.
Are Taxes Stealing?  Well, something of value is forcefully taken from you without your consent.  That sound like a pretty good definition of stealing to me.  I unpack more of these details in podcast #20 titled Taxes that care for Widows and Orphans.  And, Sergiy Saydometov and I explain it in great detail in Chapter 6 of Biblical Economic Policy.  The short answer for today: Yes, it’s stealing, but in a fallen world the government needs resources to fight crime and fires.   

Oh, one of my favorite quips, “The book in which Karl Marx called for the end of private property has been copyrighted.”  Gee…..I wonder if the dress reading “tax the rich” is the private property of Ms Ocasio Cortez?

Who did this?

Not me.  My name is Dave Arnott.  I have been teaching at Dallas Baptist University for 28 years.  I have never written, nor consulted on the writing of tax legislation.  Who has?  Joe Biden was in the Senate for 36 years.  Then he served as Vice President for eight, and as President for half a year.  AOC in serving her second term in Congress.  

As I walked by the student lounge yesterday, a TV displayed the headline, “50 corporations paid no tax last year.”  Who do we thank for that?  Joe Biden and AOC.  It would be interesting to look through their campaign promises to see how they dealt with that fact.  Maybe they had a slogan like, “We’ve written loopholes for the rich, and we’re going to write more?”

So AOC wears a dress to a gala, complaining that she has given tax breaks to rich people?  Who is she condemning by wearing that dress?  President Joe Biden, maybe. 

How Did They Get Rich?  

We have rich in America, because we have free market capitalism that she opposes.   If she had her way, we wouldn’t have any rich to tax.  So as a Socialist, she wants to eliminate the people she wants to tax.  Let me make the same insightful response that my students often make…..Huh?!  Can a socialist system tax the rich?  There aren’t many rich people to tax in Cuba, North Korea, nor Venezuela.  I wonder if reporters rushed to those countries to ask their view about the dress and its message.  

Winston Churchill said, “You don’t make the poor richer, by making the rich poorer.”  And the Dave Arnott extension is “Making the rich poor, makes the poor, poorer.”

Oh, this is one of my favorite economics lessons to teach.  I enact a scene in the classroom where I’m Wal-Mart selling a box of tissues to a student for $1.  The student gives me a dollar and I give her the tissues, then turn to the class and ask, “Who got richer?”  The correct answer is “both got richer.”  In a competitive environment, when you make an arms-length decision to buy something, both parties get richer.  

So if Jeff Bezos is worth 200 billion, that means he made his consumers richer by at LEAST $200 billion.  Isn’t that good?  You see, Socialists are not interested in history, just the future.  Here’s a little quip I wrote recently, “Socialism always works in the future, never in the past.”  If Socialists looked at the past, that is, to ask, “How did these people GET rich?”  They would find that they got rich by making others richer. It’s called consumer surplus.  Do you want more of that, or less of that?  Because low taxes encourage more of that, and higher taxes discourage it.  

Oh, and according to former Governor Cuomo, companies can move.  They did during the Obama administration.  When corporate taxes were increased, companies performed inversions.  That means they allowed themselves to be bought by a company in another country, so they could pay lower taxes.  It often happens with companies in Ireland, but the most notable was Burger King being bought by Tim Horton’s of Canada.  Burger King “shrugged,” and others will, if we tax the rich, as AOC’s message encourages us.  So the headline the next day also could have read, “AOC wears dress encouraging companies to leave the US.”  That’s true, isn’t it?

Companies would hire labor in other countries, causing unemployment in the US.  That hurts the poor, not the rich.  

Two evils of Macroeconomics

I usually cite authors in my podcasts.  But this information comes from a more common source.  My fellow readers can make comments at the end of Wall Street Journal articles.  Here’s what was written recently, about proposed increase tax rates.  Notice, this is the view of a “man-on-the-street,” proving that you don’t have to study economics to understand this stuff.  Here’s what he wrote: The impact of higher taxes on small businesses in American will be as follows:  Step 1.  Increase in tax rates  Step 2.  Increase in prices.  Step 3.  Some companies fail because customers buy less. Step 4.  Business provides raises to their employees so they can buy the more expensive goods and services. This upward spiral causes with high inflation and high unemployment.  In economics we call it the misery index!

Or said simply, there are two evils of macroeconomics: Inflation and Unemployment.  Both harm the poor.  And the message on Alexandria Ocazio Cortez’ dress calls for both of them. 

 

 

Read Along with The Christian Economist:

Wealth of States 

Biblical Economic Policy 

Animal Farm 

 

 

Watch the full episode here