Right now the United States in 14.3 trillion dollars in debt with an annual deficit of almost 2 trillion. With three wars still ongoing there seems little hope of cutting back on military expenditure and corporations certainly aren’t trimming their demands for handouts. Next year the Baby Boomers will begin retiring, which puts added stress on Social Security and Medicare. These grim facts have caused some to speculate that we should raise taxes on the rich.
Some, on the other hand, don’t want to. They say that we can’t simply can’t afford to demand another nickel from people who are worth billions of dollars. If we tax the rich more, the theory goes, they’ll respond by working less.
Now I can think of several things to say in response. First, given that Bush pushed through billions in tax cuts for the rich during his presidency and didn’t exactly get stellar economic results, I’m skeptical that low taxes for the rich are all they’re cracked up to be. I also have to ask, given the performance of rich people from Wall Street to Hollywood, whether we really want them to work hard. But for the sake of argument let’s lay those thoughts aside for the moment. Let’s ask, instead, whether it’s actually true that taxing the rich more will cause them to work less.
Consider a hypothetical scenario. Bob Dewey, from the illustrious law office of Dewey, Cheatam, and Howe, is paid $500 an hour to prepare lawsuits. Currently he’s taxed at 35%, so he takes home $350 per hour. Now imagine that we raise his taxes to 40%, so he’ll instead take home $300 per hour. The question is, will this cause him to work less. Will society no longer get the productive benefit of being sued by him?
I simply don’t see why that would happen. I don’t believe that Mr. Dewey carefully allots effort based on the money he’s taking home. I think that he either works or does not work. As long as he thinks he’s being paid enough to justify working, he’ll continue working. I highly doubt that he’ll consider $300 an hour too little. If anything, he may work more in order to make up for the income that he’s lost and maintain his lavish lifestyle. There’s no reason to jump to the conclusion that he, or any other rich person, will work less if taxed more.
I’m not claiming to be an expert economist. I don’t know whether raising taxes on the rich is a good idea or not. But this particular argument against doing so fails.