The ‘Tax the Rich!’ Reflex

Tap a typical democratic member of the House of Representatives on the knee with a rubber hammer and he or she will say: "Tax the rich!" If such a person, lounging in a lawn chair, is startled from a summer torpor by a cymbal crash, he or she will leap up exclaiming: "Tax the rich!" Forgive such people; they cannot help themselves. It is a reflex.

But people with only one idea really have no idea; they have only a mental default position. So, last week the House decided to solve the problem of finding $1 trillion for health care by increasing taxes on the income of the 1.4 percent of taxpayers who already pay 45.2 percent of the income taxes—the rich, understood, for now, as those with annual household incomes of at least $350,000. These people do a disproportionate share of society's investing and charitable giving, so there will be less of both if the House has its way.

Less of both would be an improvement, according to statists who think both should be done primarily by government rather than individuals, the better to engineer improved equality, understood as a more equal dependence of almost everyone on government for almost everything.

But there are unmentionable trade-offs. Richard Posner, senior lecturer at the University of Chicago Law School and judge on the U.S. Court of Appeals for the Second Circuit, says what no elected official dares to say: "As society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying -inequality—which is very great—between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck." Hence policies, such as steeply progressive taxation, that are intended to increase equality are likely to decrease society's wealth. They reduce the role of merit in the allocation of social rewards—merit as markets measure it, in terms of value added to the economy.

It is, of course, possible to argue that the gain in equality of condition is worth the net loss in affluence. It is, however, telling that no public official actually makes that argument.

Today, in the midst of what history may remember as the Great Recession, it is especially risky to siphon away still more of the resources of the investor class. It is prudent to expect that business investment will have to play a larger role in fueling economic growth than it has played in the last quarter century. This is because private consumption may not soon be what it was between 1983 and 2008.

Speculating in The Wilson Quarterly about a "new normal," Martin Walker, a senior scholar at the Woodrow Wilson International Center for Scholars in Washington, notes that for more than three decades after World War II, private consumption as a percentage of GDP varied within a narrow band, between 61 and 63 percent. In 1983, however, consumption began to rise, and reached 70 percent in 2007, fueled in part by $500 billion annually in home-equity loans.

Suppose the old, pre-1983 normal returns as the new normal. In 2007, personal consumption, at 70 percent of the $13.8 trillion GDP, was $9.7 trillion. Martin calculates that if it had been even at the upper end of the 1946–1983 norm, at 63 percent, 2007 consumption would have been $1 trillion less.

In 2007, Americans' savings rate was approximately zero. Today it is 7 percent of disposable income. Which is fine: -Daniel Akst, a contributing editor of The Wilson Quarterly, notes that the noun "thrift" is etymologically related to the verb "thrive." That should, however, be a sobering thought to a nation in which last year more than half of all college students had at least four credit cards. The credit card is one of what Akst calls the four horsemen of the financial apocalypse.

The other three are the automobile, the television, and the shopping cart: Cars made possible population dispersal and large lots for large houses with lots of room for stuff. Television, the powerful marketer in the living room, made it unnecessary to imagine new stuff; it showed what might be bought with credit cards, which separated the pleasure of purchasing from the pain of paying. And, says Akst, the shopping cart, although unknown in traditional department stores (carts in Marshall Field? Heaven forfend), is suited to all-you-can-carry, buffet-style shopping at Wal-Mart and Target. Carts are necessities for hauling superfluities to the large car for the drive to the large house.

If the age of conspicuous consumption is behind us and conspicuous -nonconsumption—frugality chic? "Notice how I am trying not to be noticed"?—is upon us, heaven help us. Heaven had better, because the investor class, squeezed again and again, might be too anemic to provide the economic propulsion that used to come from consumers.

© 2009