Should we raise taxes on the rich?

  • April 30th 9:00AM
  • Andrew Vitelli
Image caption Spencer Platt/Getty Images

*Updated 2021

Debate over taxes on the wealthiest Americans is nothing new, but it’s as relevant a topic as ever. It was a major focus of the 2020 US presidential election campaign among democratic candidates, with discussion over the moral, fiscal and economic consequences of raising tax rates on high earners. President Joe Biden has made it known that he plans to increase top income tax rates, and a group of 83 super-rich individuals themselves called for higher taxes on the wealthy to pay for Covid-19 recovery.  A recent poll shows that a majority of Americans support the idea of America’s wealthiest paying more taxes. But just because the majority of Americans want to tax the rich more doesn’t necessarily mean it’s right.

Here are three arguments for raising taxes on the rich, and three arguments against it.

 

We should tax the rich more

 

It makes economic sense

Taxing the rich to pay for programs that help the poor and middle class (or on things like infrastructure or national defense, which benefit all Americans) makes common sense economically, especially during a pandemic. Very simply, money allocated to programs such as affordable healthcare, Pell grants, food stamps, and Earned Income Tax Credit – or given to working- and middle-class Americans through tax cuts – will be redistributed into the economy and stimulate growth. Tax hikes on the rich would have little impact on their spending, since most of this income would likely have gone into savings.

History bears this out. President Clinton raised the top marginal income tax rate from 31 to 39.6 percent and saw GDP growth top 4 percent every year in his second term. Meanwhile, President George W. Bush’s tax cuts were supposed to accelerate growth but, instead, they led to unimpressive growth and eventually recession.

 

It’s about fairness!

The rich, by definition, have a lot of money. In fact, the top 1 percent in the US holds 15 times more wealth than the bottom 50 percent combined. Meanwhile, 34 million Americans live in poverty, with half a million homeless on any given night.

Even with higher tax rates (and fewer loopholes), the country’s wealthiest will be fine; billionaires like Bill Gates and conservative Mark Cuban, among others, attest to this, having said they would be willing to pay more in taxes. For the government to provide basic housing, nourishment, health care and education to the rest of its citizens, the money must come from somewhere. For the most fortunate to fail to pay their fair share would be a moral failure.

 

They’re already low (compared to the past)

Let’s take a look at tax rates over time. A tax reform bill that became law in 2018 set new tax rates for Americans, lowering rates for most brackets, including the wealthy, by 1-4 percent. In fact, these tax cuts helped billionaires pay less taxes than the working class. In 2015, that year’s top tax rate was less than half the 91 percent it was under President Eisenhower, a Republican. The top rate was consistently 70 percent or higher until the Reagan tax cuts of the 1980s, and those cuts resulted in the national debt tripling in eight years.

 

We shouldn’t tax the rich more

 

It’s about fairness!

First, let’s define fairness. Fairness means that Americans reap the rewards of their labor, that what they earn inherently belongs to them and not to the government to redistribute as it sees fit, and that the path to prosperity is through hard work and success. Even through a flat tax, under which the rich pay the same tax rate as lower earners, the wealthy will still end up paying more in absolute terms since they have a higher amount of income to tax. But by any reasonable definition, the amount paid by the rich is already beyond their “fair share.” For example, in 2015, the top 1 percent earned 16.5 percent of income, but paid a staggering 43.6 percent of federal income tax. Meanwhile, more than 44% of Americans pay no federal income tax at all. Entrepreneurs and business owners should not be penalized for their success.

 

It makes no economics sense

Forcing a small slice of Americans to bear an inordinate burden of funding the government is not just immoral but also counterproductive; it kills jobs, and sometimes even results in lower government revenue. Raising taxes on the rich creates a disincentive for work and job creation, slowing down both. If higher taxes discourage a business from opening or expanding, it is not just the rich who suffer but also the workers who are not hired.

Further, this means that tax hikes often do not have the intended effect of raising revenue. If high taxes slow down economic growth, the government ends up taxing a smaller amount of money at a higher rate. Sometimes, this means a tax hike actually leads to lower total revenues, but even in less extreme cases, tax hikes yield diminishing returns.

 

They’re already high (compared to other developed countries)

In the past, before the Tax Cuts and Jobs Act (TCJA) reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent in 2018, the US was in bad company. Only the United Arab Emirates, an oil-rich Middle Eastern country with fewer people than Michigan, Puerto Rico, a US territory, and Comoros had higher top corporate tax rates than seen in the US. Now, the US rates among the UK (20 percent), China (25 percent) and Canada (28 percent).

Before the corporate tax reduction, other countries had a competitive advantage over the US when looking to attract businesses. This is no longer the case and shows that raising tax rates may accelerate this trend, and every time a company moves overseas, it costs the US both jobs and tax revenue.

 

The Bottom Line: Those who favor higher taxes on the wealthy believe it makes economic sense and see virtue in some redistribution of wealth. Their free-market opponents not only see this as wrong-headed government intervention but also believe the economic consequences will hurt the rich and the poor alike. Do you think taxes should be raised on the rich, or should the status quo be preserved?

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