Q: I keep hearing that the rich are getting richer. And, I am sick of multi-million dollar paychecks for the greedy few. Why not raise taxes on those people now?
A: This is a tough one. My answer to this same question hurt my popularity with the media, about 15 years ago, on an ‘Ask An Expert’ television interview. This time I am going to answer more carefully:
First, let me say I agree with your premise, and I too think some of the corporate greed is sickening. In fact, I recently noticed that some of the Wall Street brokerage firms paid their CEOs in excess of $40 million last year. People who think they need that kind of money have a deluded sense of self-importance. I find it offensive, as do most people. They are fleecing their companies, employees, and shareholders. These are facts, and the way you and I feel about it makes sense. But we must be careful about the conclusions we draw because while it is politically correct to say, “Tax the greedy rich, and make them pay a larger share,” our American economic system could be seriously damaged if we did. History is the great revealer.
To understand this complex and important question, we have to think about a few facts that are rarely discussed in the media. First, it is factually true that the very rich do not burn their money, nor do they bury it in the backyard. If they did, that would be harmful because that money would then be removed from the system. But factually, there are only a few things anyone can do with excess net income: They can buy goods and services (spend it), or they can buy businesses, stocks, bonds, CDs, etc., (invest it). Both of these broad activities are good for the economy, which means both activities are good for everyone. The overpaid still have their greedy stripes, but whether they consume or invest their excess millions, the economy is the unavoidable beneficiary. Sure, they waste money, from the average person’s perspective. They may have five-car garages, and five cars to go inside of them, but the building of those cars and garages helps others in a very important (and unavoidable) way. This is good no matter how we feel about those who allocate it.
Now consider the alternative: raise taxes on those same people. Then what happens? That money goes into the hands of the government, where the multiplier effect of those dollars is diminished (when compared to the private sector), much becomes ‘wasted’ through gross inefficiency, and then..the economy suffers. Further, rich people feel defeated when tax rates go up. So they take fewer risks with their money, they invest less, and in many cases, they even – intentionally – earn less. Then everything slows down, and the general population suffers. However, when the super-rich feel a little penalized and defeated, does their standard of living actually suffer? Probably not. The additional money they pay in taxes probably doesn’t come out of their lifestyle; it likely comes from their excess dollars, which would have otherwise gone into additional investments.
Tax policy must be determined by clear thinking and careful investigation in order to avoid unintended consequences. Taxing the very rich, based on how we feel about them, can have serious unintended consequences because we live in America – where our capitalist system produces an average standard of living that is outstanding when compared to most of the world. A better solution would be for the Board of Directors to pay their top dogs less. This would leave more money for their shareholders, more money for their companies to grow, and more ability to create jobs and income for everyone.