The Psychology Behind a Progressive Tax
Posted by politicalpartypooper on February 24, 2010
The Republicans are fond of saying “You can’t bite the hand that feeds you.” This, of course, is in reference to the Progressive tax system in America, and that line of thought is directly responsible for the flurry of tax cuts for the wealthiest Americans since 1980. In 1979, the top marginal tax rate was 70% for any earned income above $215,400, which, with inflation, would be somewhere above $500,000 today.
Beginning in 1981, and ending with the Bush Tax cuts in 2002, that marginal rate fell to 35% on income over $311,950. In 1979, the top bracket earned forty times more income than the average American. Today, that gap has widened to 500:1. Average wages are stagnant, we have ten percent unemployment, and nearly twenty percent Under-employment, with one in five American men out of work. How to fix it…
When FDR jacked up the income tax rate on the wealthiest Americans of his time (63%), it wasn’t just to pay for his New Deal Programs, that was only part of it. The larger part of his economic plan included building a foundation that would grow and elevate the American Middle Class to become the largest class of citizens, as well as a beacon to the world for Capitalism. It worked. For decades, unemployment remained moderately low, Middle Class incomes grew, families were able to support themselves with one earner, college graduate rates skyrocketed, and retirements were more secure. In less than a generation, an entire class of Americans moved from poverty level to the Middle Class, and became the envy of the world.
Why did it work? Because no one wants to give the Federal Government any more of their profit than is absolutely necessary. FDR understood this, and he also understood that there was only one other place that the wealthy would put that money; back into the businesses they owned, in capital equipment purchases, hiring, and investment in other American companies. Of course, it helped that World War 2 made America the Arms dealer to the world, and afterward, our economy was squarely placed as the preeminent economy of the world. For the first time in American history, jobless rates remained beneath eight percent for almost forty years, while the economic mobility of the Middle Class continued to grow. But, since 1981, when the tax rates on the wealthiest Americans began to be relaxed, jobless rates have again climbed above ten percent, twice in the last twenty-six years. Coincidence?
Not likely. The simple fact that most Americans miss is that when you give people an incentive to keep more of their money, that is exactly what they will do. Conservative economic theory dictates that the only way to grow the economy is through tax cuts, especially for the wealthy. Since 1981, no other class of people has seen a larger tax cut than wealthy Americans (70% to 35%). But the economy has struggled, and the Middle Class has borne the brunt of that, with their wages stagnant, and unemployment twice hitting ten percent and higher, something that had not occurred since the late 1930’s.
To make this more personal for you, let’s say you owned a business that brought you an income of $2 Million per year. Now, let’s add to that mix an income tax hike of 70% on income earned over $1 Million. How likely are you to keep that remaining $1 Million as income, knowing that if you do, the Federal Government is going to collect $700,000 of it? An educated guess indicates that you, like your predecessors before you, will pour that $1 Million back into the company rather than see it end up in the hands of a government that you consider to be inefficient at best. Basic American human psychology. Simple.
Let’s say that instead of a 70% tax rate, you are paying a 35% rate, which means you get to keep 65% of the money you report as income above $1 Million. A best guess would then indicate that you would be far more likely to keep the extra $ 1 Million under these circumstances than under a 70% tax rate. Is that 70% rate fair? Hell, no. Is 35% fair? Maybe.
But fair has nothing to do with Capitalism, which has never concerned itself with fairness so much as it has been focused on profit and efficiency. It is the Federal Government’s duty to see that Capitalism works for all Americans, not just the lucky few, and that is a job that, while onerous and hateful, is nevertheless part of providing opportunity for all. Capitalism itself cannot exist for long if the vast majority of money resides with one small group of people. Sooner or later, under those conditions, Capitalism will turn into Socialism, as more and more citizens become unable to support themselves, and the wealthy become the sugar daddy of America.
Either way you slice this pie, the economy starts at the top. Trickle down is true, only not in the sense that Republicans believe it to be. In order to encourage small and large business growth, you have to give people who own businesses reasons to hire. Especially at the top tax bracket, the only way to encourage the wealthy to invest in their companies, and thus, in people and equipment, is to make it prohibitive for them to pocket more money. Again, I’m not saying this is fair; but Capitalism isn’t about fairness. If it were, everybody would earn the same wage, and we’d call it communism, with no one owning more property than the next person. I’m pretty sure no sane American business owner wants that.
That is a simplistic way of summing up how Capitalism will or will not work, but our history is no fluke. When progressive rates made pocketing extra profit prohibitive, America, and especially America’s Middle Class, thrived. There is no way around that fact. The numbers do not lie. We’ve had two very long periods now to show us how each method works. Cutting taxes on the wealthiest Americans, while “fair”, has failed to allow the majority of Americans to improve their financial situations. More and more Americans are falling from the Middle Class into poverty, which reverses a trend that lasted for nearly forty years. As onerous as that very high progressive tax rate is, you cannot argue against the fact that Middle Class citizens were better off under it, while the wealthiest Americans continued to enjoy vast success. The lower tax rates are clearly indicating that when the wealthy are encouraged to keep more of their money, that is exactly what they will do, to the detriment of the entire American economy. High tax rates on the wealthy isn’t about financing welfare. It’s about getting them to put their money back into the economy, rather than forcing the government to do what Capitalism ought to be able to do by itself.
Hey, I don’t blame the wealthy for wanting to keep more of their money. It’s basic human psychology. But how long will their money last in a system where more and more, they will have to support America not by employing them, but by giving them welfare checks? Socialism is right around the corner, if we do not change things fast. The only way to avoid it is to raise up the Middle Class, and get more of our poor back to work, and on the road to the Middle Class. Only the wealthy can do that, and they have to be encouraged to do it, or, to put it more bluntly, blackmailed to do it.
In summation, the only way we can fix our economy for the long term is to allow the wealthiest Americans a low tax rate on the first portion of their earnings so they can continue to enjoy the excellent lifestyle that they have, while encouraging them to hire and make capital equipment purchases by using a prohibitive tax rate on the rest of their profits. This is the only method in our history that has proven to work for all of America over the long term.
Capitalism isn’t fair. It is what it is, but if we are going to remain Capitalists, then we need to end the assumption that low tax rates will encourage the wealthy to hire more Americans. It’s simply not true. When you allow anyone to keep more of their money, that’s exactly what they do; history bears that out time after time. You have to give them a reason to reinvest, and that means higher tax rates, unfortunately. It isn’t about soaking the rich, although I am sure some who read this will see it that way. It’s about encouraging them to do the right thing, instead of doing the exact wrong thing. The greater the gap between the rich and the poor, the more assured we are that Capitalism will ultimately fail.