Although the proposals for a special tax on the very wealthy by Alexandria Ocasio- Cortez (AOC) and Elizabeth Warren has received a lot of criticism, it also has gained a lot of support. Like the dumb farmer that doesn’t learn from experience or adapt to agricultural conditions, these proposals assume that the very wealthy are dumb and won’t adapt to changes in tax law.
The super wealthy like Warren Buffett and Bill Gates have helped give these confiscatory tax proposals life by claiming that they are under taxed. Bill Gates says, “I need to pay higher taxes” and Warren Buffett joined him by saying “I don’t need a tax cut.” They are not alone, founded in 2010, a group named Patriotic Millionaires also advocates higher taxes on the wealthy. According to an article in The Atlantic–pay more—a survey by US Trust found that 48 % of those with several million dollars in assets are willing to pay more taxes for the common good. There is no doubt there is a a survey that also shows that Venezuelans love Maduro.
Implicit in the US Trust survey and the views of the very wealthy like Gates and Buffett is the belief that the Federal Government can spend their money more efficiently and wisely than they can. That is a triumph of hope over experience. But this implied belief is contradicted by those like Gates who have set up foundations for philanthropic objectives as a way to spend their wealth before the government gets its hands on it.
What is driving these wealthy individuals to act against their self interest? One explanation is fairness. The super wealthy have to believe that they benefit disproportionately from tax cuts. They also seem to believe that lost federal revenue means higher deficits and a growing debt. Neither explanation passes the red-face test. The Tax Foundation reports show that the tax system is already very progressive. Forty four percent of tax filers pay no federal income tax while the top 1% pays 37.3% and the top 10% pays 69 %. The tax rate for the top 1% is 26.9 % which is 7 times higher than the percentage paid by the bottom 50%. To make the point more compelling, a CATO Institute analysis that “the Top 400 paid $29.4 billion in federal income taxes in 2014, an average of $74 million each.” This represents 2.13% of all taxes paid. While that might seem like a small percentage, in it represents 70% of the taxes paid by the bottom 50% in 2016, the latest year available.
As for the notion that paying higher taxes will help with reducing the deficit and debt, the proponents of higher taxes on the wealthy have made clear that they want more revenue for increased spending; not fiscal responsibility.
The wealthy who say they want to pay more taxes know these facts. So, there must be some other reason especially since Bill Gates and Warren Buffett have pledged to give away half of their wealth and have recruited a number of others to do like wise. As of last year, 183 people or couples had signed onto Bill Gates’ Giving pledge which involves a commitment “to dedicate the majority of their wealth to giving back.”
A more compelling reason may be the GroupThink effect of being viewed socially responsible by the public and their social network. In fact, those who have created philanthropic foundations to give away the majority of their wealth are showing the shallowness of their support higher tax rates by giving away money for which they have received tax deductions that resulted in lower taxes.
People like Bill Gates and Warren Buffett, and perhaps most of the super wealthy, derive most of their income from capital gains which makes it easier to advocate higher incometax rates. They know that the effect will be small and would encourage those subject to it to search for other ways to shelter income. At some point, the AOCs and progressive presidential candidates will turn to raising the capital gains tax as a way of increasing taxes on the very wealty. That will make for much political theater but won’t produce much in the way of income or economic benefit.
Increasing the capital gains tax rate would be counter productive in that it would provide an incentive to hold capital assets longer thus delaying when the government would get tax revenue. Economists call this the locked in effect which means that more profitable investments can’t be pursued. Further, economic research has shown that lower not higher capital gains rates increases economic growth. While the case is made that lower capital gains rates encourage more sheltering because of the larger difference between capital gains and regular income rates, the evidence supports the economic case for a low rate because it increases capital investment and new business formation.
At least some of the politicians advocating for these taxes understand behavioral economics and the tax policy effects because they are already wealthy and know how to protect their wealth. Wink and nod policy proposals make for grand illusions and great politics but they are lousy and dangerous economics. What people like Warren, AOC, and the other progressives running for president are really doing is using one of Saul Alinsky’s Rules for Radicals–Pick the target, freeze it, personalize it, and polarize it—to demonize the wealthy for their own political gain. Class warfare has unintended consequences.