Why Rich People Should Pay Taxes

This argument usually comes from a moral point of view, running on the lines of “the wealthy owe the country because it has served them so well” or as Warren Buffet reminded us today that it’s about “shared sacrifice.” Liberals who make this argument are right but there are fundamentals involved that can help them explain why. Taxes are a bad word because nobody, no matter how much money you earn, likes to pay them. But for those who earn a lot of money it’s important to remind them what they give the government will help them earn more money in the future.

A paper by Jon Bakija from Williams College, Bradley Heim from Indiana University, and Adam Cole from the Treasury Department, looks at who the top earners in the United States are. Looking at tax returns between 1979 and 2005, they find that Executives, Managers, Supervisors, and Financial Professionals are the ones who reported the highest incomes. These high earners either work for a major corporation, own their own business, or have some sort of combination of work and family money. What they all have in common though is that the majority of their earnings come from the stock market.

Whether it is through a bonus working for a firm on Wall Street, the Managers stock options within the company he/she works for, or if the family or individual already has a lot of money, the majority of their earnings for the year depend on how well the stocks they own do.

This is different from the majority of people who try and save enough to eventually invest in the market, watch it for about fifteen years, and then retire. Longer term investments in the market always get you more earnings. But the super rich have the most to lose because they have the most amount of money in it and rely on the markets going up in a shorter time span. That means they have every reason to make sure people don’t have an excuse to rile the markets.

The brokers who run the stock market are the ones who invest the rich people’s money, and are paid based on how much their clients portfolio grows. So while most people are thinking about the long run the people who have the most money in it and work on Wall Street are only thinking about the short term. Brokers make their decisions based on the information they get that day. It’s never a complete analysis and since it’s impossible to know everything, there is based on experience and “instinct.” It could be a companies earning report, how the stocks overseas did, news about a merger between two companies, anything that they believe will earn them money. But even with the same information and experience different conclusions can be made.

So why does all this mean rich people should pay higher taxes? One word: stability. Higher taxes that go toward social programs like Social Security or Medicare make people feel secure that they are not going to lose them in the future. When politicians are saying changes need to be made to these programs because they are running up debt people get scared. This is bad for two reasons; 1) it makes people less confident in the economy and markets become stagnate because brokers don’t know what is going to happen. 2) Politicians take advantage of this anxiety and get voters to elect them based on not raising the debt ceiling, where the rumors of default could cause the market to go down.

Don’t forget about the obvious reason that the money collected from top earners can be used to create jobs. Jobs aren’t just important so the jobless rate goes down, it’s because when people have jobs they spend money. For those who say they get food stamps and other ways to spend, it’s not enough to live on and having a job gets you more money than being reliant on those social protection programs. Plus, when people have a job (especially in these times) they are happy and would be more willing to splurge a little. When people spend money it helps the economy, Wall Street, and rich people earn more money.

The irony in this is that people who have the most money also save the most. According to one of Robert Reich’s tweets, the “Richest 1% of Americans do 20% of all consumer spending, richest 5% do 37% of spending. But the rich also account for most of the saving. Result: insufficient demand.” So yes, rich people rely on poor people to spend money and need to make sure they are able to do so.

On top of all this, the study by Bakija, Heim, and Cole also found that if the Bush Tax Cuts that are set to expire would not cause the top earners to lose a lot of money. They also found that every dollar collected by the top 1% of individuals equals $6.57 cents to the government. That money can be used to boost the economy and the stock market. So yes, rich people, like everyone else, like to earn more money. But they are the ones who can really get the economy going, have the money to do it, and more importantly gain the most from doing it.