I stumbled upon a video last week from Political “Economist” Robert Reich where he discussed the proposal of raising taxes on the richest Americans:

In this video, Reich outlines 3 points on why taxes should be raised on the rich:

  1. To fill in the gaps of budget deficits;
  2. Top tax rates are at historic lows, meaning that the rich aren’t “paying enough” like they were in the past; And
  3.  They can afford it.

The whole time I was listening to the spew of envy for the rich and the “fair share” talking point, I was already putting together mental rebuttals against these points. I would actually love to take the time to address all 3 of these points individually with some decent detail.

The first point of the video, Reich argues that we have major federal budget deficits because the rich do not pay the sufficient taxes to pay for the ever-numerous government services. Furthermore, he makes the assertion that if the rich do not pay more in taxes, then the middle and lower class Americans will have to pay more in taxes to make up for the revenue funding. I would like to turn the attention to the budget deficits issues first off. Reich’s claim is that we have the deficits that we do because of insufficient revenue intake from the rich, yet, he does not even take into account or even mentions the government spending factor. Government spending has dramatically increased overtime since the federal debt and deficits became a major issue. The Heritage Foundation compiled statistical data from the US Census Bureau and Congressional Budget Office of federal spending per household from 1965 to the present day. Since 1965, federal spending per household has shot up from $11,900 to $30,015 in 2012. That is a 152% increase! With the increasing, overbearing roles of government combined with spending growth for each federal department and agency, it is easy to see where the fault of deficit growth lies. Another piece of information that Reich overlooks in this point is the relationship between individual tax rates and federal revenue flow.

This goes right into my analysis of Reich’s second point: he fails to look beneath the surface of given information and draws a faulty conclusion that higher tax rates mean “fair share” taxation. It sounds as though Reich makes a case here, until you look at the numbers. Looking at the time period of 1964-81, the time frame Reich particularly focuses on, federal revenue as a percent of GDP stood at 8%, including capital gains (capital gains tax rate was 28% until it was reduced in 1997). But if you look at the top tax rate in the present day, the numbers stand in comparison to those from 1997-2002. Even though the growth in federal revenue as a percent of GDP is relatively small, it indicates that higher tax rates (like what Reich advocates for) do NOT translate into higher intakes of revenue. Even with the reduction of capital gains tax rates, revenue intake is still slightly greater than it was when the rate stood at 28%. Therefore, Reich’s “historic lows” assertion is obsolete.

Lastly, Reich’s final point is totally subjective and ignores the economic consequences of raising taxes. Because they can afford it? This is where I get a little preachy so please bear with me.  He says that the rich take home the largest amount of income and more than the bottom 50% of Americans combined, overlooking the IRS data that the richest 10% of Americans pay over 70% of all taxes that contribute to federal revenue. Another important thing to note is that income inequality, while it exists naturally in free market economies, has been artificially expanded and exacerbated by the inflationary policies of the Federal Reserve, but that is for a different discussion. Reich even implies that there is a correlation between tax reduction and unemployment increases (referring to the Bush Tax Cuts which are set to expire on January 1st of 2012). Really? Is that the best he can do? I’ll use the corporate tax rate (35%) as an example of the economic consequences of higher taxation. Corporations, which are generally subjected to scrutiny of wealth-holding, do two of the following things when it comes to dealing with taxation: outsource labor/jobs to cut costs or deduct the pay of workers to pay for corporate taxes. With the many loopholes that exist in our broken tax code today, it is easier for corporations to subject its workers to income cuts. Overall, the net losses of higher corporate taxation far exceed the gains of it. This is just one of many examples that reflect the harmful effects of increased tax burden on individuals and the marketplace. To say that they can “afford it” is no legitimate justification to raise taxes, especially with the numerous net losses of higher tax burdens.

I agree that our tax code needs to be reformed, but trying to modify an entirely broken system is not the way to go. Personally, I think that a consumption-based tax or flat tax would be a far better alternative to the income tax. To say that government should, by force of law, take more of an individual’s property (their income, in this case) based on the subjective ideal of paying one’s “fair share” is ignorant of economics and removes legitimacy of the private property rights of individuals. Economically and morally, discriminatory taxation is wrong and poorly-calculated. If we are to achieve any economic prosperity, we need to scale back most of the regulations that exist on the market today, restore sound currencies such as gold and silver to restore wealth and purchasing power in the American market, rethink the role of government in economic life (in areas such as Education, Commerce, and Energy), and allow the overall market to work to its own devices. Prosperity isn’t perfect, but it will ensure more freedom on the part of the individual to pursue their economic interests than the alternative which promises “equality” of wealth.