Punishing the wealthy punishes us all

By , csmonitor.com

Lest there be any confusion about the overarching philosophy of John Kerry, the presidential debates cleared that up: income redistribution and penalization of the rich. Though emotionally appealing, this philosophy hurts all Americans in the long run.

Kerry's strongest and most consistent campaign message is the lament that the top income-earners benefitted from President Bush's across-the-board tax cut, and that their money instead should have been spent on government programs. During the three debates he invoked this theme about a dozen-and-a-half times, pledging to raise income taxes on people earning over $200,000 and lowering taxes on those making under that amount.

This is a true class warfare-style strategy: punishing the rich and rewarding the non-rich. It would be terrible for our economy and hurt the rich, poor, and middle class alike.

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The reason America's standard of living is high - and why our poor would be considered middle class in the majority of other countries - is because we produce so many goods and services per person. Monetary rewards, and/or a desire to break out of one's current economic class, are largely what motivate us to produce those goods and services.

Raising taxes on the rich reduces those monetary rewards, which in turn lowers the incentive to work harder or smarter. That's bad enough. To raise taxes on the rich while reducing them on the middle class - Kerry's plan - reduces that incentive even more.

It's akin to your boss cutting your pay if you put in longer hours, and raising your pay if you work shorter hours.

Actually, lowering taxes on the middle class and raising them on the rich harms economic growth even more than leaving middle-class tax rates intact while raising them on the wealthy. It results in what economists call a higher marginal tax rate - the tax rate on what you earn above a certain dollar amount. It is marginal tax rates - not overall tax rates - that so affect our incentive to produce. Why put in extra work if the extra income that comes with it is going to be taxed higher?

A May 2001 Wall Street Journal editorial indicated that "a recent flurry of academic work suggests that small-business people - and the number of small businesses - live or die by marginal rate changes."

A study by Martin Feldstein and Daniel Feenberg of the National Bureau of Economic Research found that following the 1993 tax increases, high-income taxpayers reported 8.5 percent less taxable income that year than they would have if their tax rates had not increased. This is largely because, along with shifting compensation from taxable cash to untaxed fringe benefits, people such as the self-employed and senior executives can reduce their taxable earnings by a combination of working fewer hours and taking more vacations - i.e., fewer goods and services produced.

The ill effects of slower economic growth particularly play out over the long term. Europe, with its high marginal tax rates, serves as a good example. In 1973, per-capita income for the United States was about 26 percent higher than that of Germany. After three decades of slower growth in Germany, the gap had widened to 37 percent. The numbers for France are similar.

Per-capita income of Germany and France is about the same as that of our least-wealthy state, Mississippi. A recent study by Edward Prescott of the Federal Reserve Bank of Minneapolis - and this year's co-winner of the Nobel Prize in Economics - concludes that Europe's higher taxes account for almost all the difference in labor force participation rates between Europe and the United States. As taxes have risen over the past three decades, European workers have responded by working less.

There are plenty of other good reasons not to penalize rich people. (For the record, I'm not rich.) They are by far the biggest savers. Were it not for their savings, there would be little money available for the rest of us for housing loans, education loans, or car loans. Funds for productive investment by businesses also would be scarce. And most people owe their jobs to a rich person - the owner of the business they work for.

It's not as if the rich are undertaxed. According to 2001 figures - the latest year of available data - the top 1 percent of taxpayers pay about 34 percent of all individual income taxes. Kerry lambastes Bush because the top 1 percent's taxes were reduced along with those of everyone else who pay taxes. Well of course - if you cut taxes on everyone, people paying most of the taxes will be affected.

Who says John Kerry doesn't have a strong message? It is loud and clear: penalize the wealthy, and reduce the incentive to become wealthy. That would harm the long-term well-being of Americans of all stripes.

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