Do You Resent the Rich Or High Marginal Tax Rates More? Vote!

Over The Economist, a spirited and depressing debate (for reasons I'll explain in a second) is going on between French economist Thomas Piketty and the Cato Institute's Chris Edwards. The proposition being argued is "This house believes that the rich should pay higher taxes" (because it's an English rag, The Economist has to follow all sorts of stuffy Britoid conventions out of Tomkinson's Schooldays; look for their editorial board to expire in a series of autoerotic asphyxiation accidents someday).

Piketty wants to impose a top marginal rate of 80 percent on all incomes above €1 million—or more than twice what the top rate would be in the U.S. even under Obama's proposition. To get inside the head of someone who wants to jack rates that high, note that he concedes that the goal is not increased revenue but something like social justice (his version of it anyway) and because he believes if you squeeze the balloon at the top, the air will redistribute to the bottom:

The main objective of raising marginal tax rates on the rich is not to raise additional tax revenue, but rather to keep top compensation under control and to curb the grabbing hand. In fact, the proposal that I am making—introducing a 80% marginal tax rate on all annual incomes in excess of €1m, leaving the rest of the tax system unchanged-would probably raise limited additional tax revenue….

I've got little sympathy for the rich or even the relatively well-off (and don't even get me started on people who consider themselves middle class and are in the top 20 percent of income-earning households—those of you in households making more than $88,000 know who you are). Piketty mentions empirical work on the effects of marginal tax rates on the very rich (typically defined as the top 1 percent or 5 percent of earners) and he's right that there is little empirical evidence to suggest that millionaires stop working hard if rates go from 35 percent to 39 percent or even higher. However, if his goal is to curb "grabbing hands" and all that, then he needs to demonstrate that penalizing the rich via higher marginal rates will actually raise the bottom of the income ladder. He doesn't do that because he can't. He's in love with the period from 1932-1980 because he says that high top marginal tax rates kept the super-rich in check. Forget the stupidity of that statement for a second and focus instead on what life was like for, say, the bottom 10 percent. Would anybody seriously doubt that over the past 30 years that the poor's material living standards have increased dramatically, all while the grabbing hands of the rich have gotten relatively more loot? As Michael Cox and Richard Alm have shown, the poor today have, on average, far more amenities than typical Americans did in 1970.

Piketty fails to mention the grabbing hand of government, naturally. But here's something to consider in any discussion of "grabbing hands": In 1980, the top 5 percent of households paid 37 percent of all income taxes in the U.S. By 2006, that share had grown to 60 percent. How much of total income did the top 5 percent snag in 2006? About 37 percent. That's high for sure, but not nearly as high as the amount of tax they kick in. As for the top 1 percent, in 2006 they snagged about 20 percent of total income and kicked in about 40 percent of total income tax revenues. (The above stats are embedded in various tables here.)

The grabbiest hand, in short, belongs to Uncle Sam. And if anybody thinks that the government is going to be a fair and honest broker in redistributing income, well, I've got some toxic assets you can buy at an enormous premium.

What's depressing about The Economist debate (other than the superflous "u" in words such as labor, a waste of time and energy that must be a drag on the economy)? Readers can vote on what side should triumph and Piketty is winning, despite the (IMO) stronger arguments of Chris Edwards.

Go here to read the whole thing and to vote.

Hat Tip: Veronique de Rugy of Mercatus.