Taxes and the Rich

I'm afraid I am not very good at maintaining this blog. But here's a reply I sent to a friend in response to this article: http://www.creators.com/opinion/larry-elder/in-defense-of-the-rich.html. I'll just put my reply up here for the record.

The Larry Elder article makes two points with which I take issue. The first (which required the development of a spreadsheet) is that the rich (top 5%) pay 60% of taxes. Again, this is misleading because it does not take into account the proportion of taxable GDP that goes to the rich. If we assume that 50% of taxable GDP goes to the rich (a conservative estimate; I've seen estimates of over 90%) then my spreadsheet shows that the average effective tax rate for the upper 5% is 20%, which is about what both Bush (24%) and Cheney (20%) paid in taxes, according to Elder's figures. The bottom 95% pays an effective average of 14% in taxes, which is lower than that for the rich but we're hardly talking about rates that "soak the rich". In fact, this is very close to a flat tax, which is quite regressive.

Elder's second point, mentioned in an aside, is that the rich are "job creators". I know of no evidence that this is the case; the claim seems to be based on the _theory_ that the rich use their money to "build up" their industries, which creates jobs. But this theory ignores the fact that producers only expand production when there is demand for what will be produced. And demand requires consumers who have the money to buy what is produced. And consumers get their money from working jobs. When there is high unemployment there is low demand so the "rich" are not inclined to invest in expansion and hiring. If they were so inclined, that would fix things right up. But the data suggest that investment doesn't occur until _after_ there is growth in consumption.

The growth in consumption can happen simply because the economy bottoms out or because the government intervenes and produces consumers (by hiring people to do stuff that industry doesn't want to do, like improve infrastructure). The lesson is that it is _both_ the rich (through capital investment) and the middle class (by having jobs and, hence, money which maintains demand) who create jobs: it's a closed loop system. ... Read More

By the way, this is the problem with all contemporary economic models; they don't take into account the closed loop nature of an economy. The free-marketers think the economy is driven by producers; the socialists think it is driven by consumers. And control theorists like me just sit on the side lines and hollish;-)