New research shows that we shouldn't swallow conservative
claims about taxes.
What happens when
nations cut taxes for their richest citizens?
Economists Thomas Piketty and Emmanuel Saez, two of the world's most respected authorities on the
incomes of rich people, have a straightforward answer: In nations that slash
tax rates on high incomes, the rich significantly increase their share of
national income.
Here in the
United States, for instance, the tax rate on income over $400,000 has dropped
by half, from 70 to 35 percent, since the 1970s. Over that same span, the
households that comprise the "1 percent" have over doubled their
share of the national income, to 20 percent.
In many European
nations and Japan, by contrast, tax rates on the rich didn't fall as fast or as
far. And rich people's slice of the income pie increased "only
modestly," note Piketty and Saez in a new analysis they
co-authored with researcher Stefanie Stantcheva.
This phenomenon doesn't trouble conservatives. High taxes on rich people, they claim, do terrible economic damage by discouraging the entrepreneurship that makes economies strong. Lower taxes on the rich, this argument continues, encourage entrepreneurs, who invest and create jobs when lower taxes let them keep more of the income they take in.
Yes,
conservatives freely admit, the rich can and do amass plenty of money in a
low-tax environment. They'll even increase their share of national income. But
the rest of us shouldn't worry. Thanks to the rich, right-wingers argue, we all
benefit from a bigger and better economy.
Piketty and his
colleagues put these claims to the test. If the conservative argument reflected
reality, they point out, nations that sharply cut tax rates on the rich should
experience much higher economic growth rates than nations that don't.
In fact, the
three economists note, 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 explain, "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 countries that
go soft on taxing the rich, top business executives don't suddenly — and
magically — become more entrepreneurial, more "productive." Instead,
they suddenly find themselves with a huge incentive to game the system, to
squeeze out of their enterprises every bit of personal profit their power
enables.
The more these
executives can squeeze, the more they can keep. The result? The 1 percent in
nations that cut taxes on high incomes proceed, as Piketty and his fellow
authors put it, to "grab at the expense of the remaining 99 percent."
Millions of us
know this grabbing first-hand. We'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 behaviors? Piketty and his fellow analysts have a
suggestion: raise taxes on America's highest-income bracket. Raise them as high
as 83 percent.
This suggestion,
the three scholars acknowledge, may right now seem politically
"unthinkable." But back between the 1940s and the 1970s, they remind
us, the notion that we ought to raise taxes on the rich to reduce the incentive
for outrageous behavior rated as our conventional wisdom.
In those years,
policymakers — and the public at large — felt strongly that pay increases for
the wealthiest Americans reflected "mostly greed or other socially
wasteful activities rather than productive work effort."
Is this mid-20th century
perception about pay at the top now about to make a comeback? Piketty and
friends certainly think so. Let's hope they have that one right, too.
OtherWords columnist Sam Pizzigati edits Too Much,
the online weekly on excess and inequality published by the Institute for
Policy Studies. OtherWords.org