‘Soak The Rich’ is drying up

Warren Buffett and his pal BarryO have tried to sell Americans on this concept of jacking up tax rates for upper income Americans.  Here in Moore County, local leftist gadfly Dusty Rhoades tried hard to do the same in his regular column for our thrice-weekly Pulitzer Prize winning local paper.

Dusty’s excitement was stoked by a recent campaign speech by a Massachusetts Senate candidate.  In today’s Wall Street Journal, George Mason University economist Russ Roberts pokes huge holes in the arguments of Dusty, BarryO, Buffett, and the Massachusetts Democrat:

Elizabeth Warren—Harvard Law School professor, former Obama consumer-protection czar, and now a candidate for Senate in Massachusetts—recently gave a revealing presentation of her views on justice and taxing the rich:

“There is nobody in this country who got rich on his own. Nobody,” she said at a campaign event. “You built a factory out there—good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. . . . You built a factory and it turned into something terrific or a great idea—God bless, keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay it forward for the next kid who comes along.”

There’s much truth in Ms. Warren’s statement. But if government stuck to what it does fairly well—roads, police, fire and the courts; enforcing contracts that help businesses interact with their customers and other businesses—the federal government wouldn’t need to spend over $3.5 trillion a year, as it now does. And of course it’s state and local governments—and not Washington—that primarily fund police, fire and education, so it’s a bit strange to ask the rich to pay their fair share of federal income taxes because they enjoy police protection.

Much government spending supports activities that are ineffective or even harmful to the economy, often helping the politically powerful at the expense of the rest of us. Wouldn’t it be great for the federal government to stop federal export subsidies, propping up financial institutions, meddling in the education system, and trying to engineer the entire health system from the top down?

If the feds stopped all that, Ms. Warren would have a stronger point. We could all feel some gratitude for government’s role in helping us live better lives. All of us, rich and poor, would look at government differently.

Roberts also raises questions about the idea of paying one’s “fair share”:

Ms. Warren implies that the rich aren’t paying their fair share. I’m not sure what that is, but they’re already paying a lot of taxes. In the latest data from the Congressional Budget Office, from 2007, the top 1% of households paid 28.1% of all federal tax revenue—income taxes, payroll taxes and so on—for a total of $722 billion. That would buy plenty of roads, police and fire protection—and plenty of education, too.

But perhaps Ms. Warren shouldn’t mention education. Government does such a bad job educating workers in the public school system that businesses have to spend a lot of money training their work forces in basic skills. Does that mean entrepreneurs and factory owners can get a partial refund on their taxes?

The other part that’s missing from Ms. Warren’s narrative is that all Americans, rich and poor, benefit from the public spending she mentions. It isn’t just Steve Jobs who benefits because Apple iPads come to the Apple Store on public roads. All of Apple’s customers benefit too. If her argument is that taxes should be related to benefit, should we raise taxes on the poor and the middle class? Sergey Brin and Larry Page became billionaires by creating Google, but the gains to the rest of us are much larger. Messrs. Brin and Page aren’t able to capture anything close to the benefits they’ve created for the rest of society. So should the rest of us pay a bigger share of the taxes than Google’s founders?

Roberts suggests that one of the best ways to get our economic house in order is to go after the special “favors” D.C. politicians hand out to their wealthy cronies and contributors (i.e., Solyndra, Wall Street, TARP):

Ms. Warren is certainly correct that some rich people aren’t carrying their weight—those who live off the rest of us by twisting the rules of the game in their direction: the sugar farmers who benefit from sugar quotas, the corn farmers who benefit from ethanol subsidies and those sugar quotas, and especially the Wall Street executives who have managed to convince both parties that the survival of their firms, even when they make disastrous loans to each other, benefits the rest of us.

But raising taxes on the rich is the wrong way to fix this problem.

When the super-rich pay such a large share of the tax burden, the interests of the political class and of the wealthiest Americans coincide in a particularly creepy way. The politicians want the rich to thrive—they’re the cash cow they milk via taxes. When the top 1% is the source of almost 30% of all your revenue, you have an incentive to take really good care of those people. That helps politicians of both parties convince themselves that coddling Wall Street is good for Main Street.

The symbiotic relationship between politicians and the super-rich is destructive of democracy and our economy. Let’s not make it worse. To close our deficit, let’s spend less rather than tax anyone more.

So much of what government does is beyond its core competencies. Get back to basics. Fix the roads that need fixing, build bridges that go somewhere, and let the creativity of America’s innovators flourish.