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NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

You Cannot Raise Taxes on the Rich



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Thanks to the fiscal-cliff deal and the Obamacare tax, we now have a tax code that is more “progressive” than at any time since Jimmy Carter was president. It will be interesting to see what long-term effect that has on household-income trends. The results may prove counterintuitive.

Tax increases on high-income people may be redistributive, but not always in the way intended. That is because we pay taxes individually in the short term, but in the long term we pay taxes collectively: Individuals and firms pass on tax costs to employers and consumers to whatever extent they can, just like any other cost. But the same factors that make any given worker a high-income wage-earner in the first place are likely to make that worker one who can most effectively pass on tax expenses. Likewise, the most profitable firms in many cases will be the ones that have the most power to pass on tax expenses to consumers or suppliers.

A high-income worker is one who by definition is in high demand. The same factors that make him a high-income worker also enable him to demand higher wages in response to tax increases or other factors that diminish his real income. You see this all the time with financial and tech specialists who are recruited to positions in high-tax areas such as New York or California: Workers in that position, or headhunters recruiting them, simply add taxes and other cost-of-living factors into the starting point of income negotiations. A $100,000-a-year job in Manhattan is not the same as a $100,000-a-year job in Muleshoe.

Likewise, companies with very in-demand products (Apple, Mercedes-Benz) have the most ability to pass costs along to consumers, while equally powerful but price-constricted firms (Walmart) have the most power to pass expenses on to suppliers and other business partners. A tax hike on Walmart is not necessarily a tax hike on Walmart — it’s likely to be a tax hike on, for example, Cal Maine Foods, which relies on Walmart for a third of its business. In business as in love, the power in a relationship is always in the hands of the party with the least to lose by walking away from it.

Which is to say, it is not clear that you really can raise taxes on the rich, even if you try.

At the other end of the spectrum, low-wage workers are those who by definition are not in very much demand and therefore have the least ability to negotiate tax offsets. The same is true for less powerful firms.

So, let’s say you’re Walmart, and your top hundred inventory-management, systems, and finance guys all come to you looking for a 10 percent bump because of the fiscal-cliff tax hike and the Obamacare tax hike. Walmart does not live and die by greeters or Cal Maine eggs — it lives and dies by logistics and finance, and it really needs people who are good at that. It will work as hard to keep its top talent as Apple will to keep its top engineering and design talent. So where does Walmart go to get that money to keep its top talent? If you have 100 high-wage specialists you really need to keep happy and tens of thousands of low-skilled greeters, cashiers, warehousemen, etc., all of whom you are pretty confident you can easily replace, you are going to be tempted to shift some money from the big, low-skilled pot to the small, high-skilled pot. Likewise, if Walmart has a supplier that represents 0.01 percent of its sales but relies on Walmart for 33 percent of its own sales, who do you think is going to prevail if Walmart decides it needs to knock prices down by a nickel?

We may not consciously plan that kind of thing down to the dime, but people know that there is a difference between their pre-tax income and their real income, and people with the market power to maximize the former also have the power to maximize the latter. Put another way: Even a very progressive tax code “does very little to alter the market distribution of income.”

It is transfers, not taxes, that really generate such progressivity as we have in the United States. As Lane Kenworthy shows, the overall U.S. tax system — federal, state, and local — is not all that progressive in its effects, despite a very progressive graduated federal income tax. What low-income workers don’t pay in federal taxes, they make up for in state and local taxes, particularly sales taxes, which are basically a flat income tax for the poor. Kenworthy finds that each quintile pays about 30 percent of its income in taxes. But the system becomes much more progressive when transfers are accounted for.

Tax hikes on the so-called rich may decrease the private sector’s share of income, but they probably will not do much to decrease the real income of high-wage workers and may in reality increase government revenue at the expense of low-wage workers in the long term, though it is very difficult to disaggregate the complex relationships between taxes, wages, and prices. But those who say that they are most interested in economic inequality would do well to follow Kenworthy’s example and look at transfers rather than taxes. Means-testing Social Security and Medicare would do more to make the total package of taxes and transfers more progressive than any tax hike likely to pass Congress in the foreseeable future. It is also a reform that many conservatives and deficit hawks could support. This should be persuasive to those on the Left whose interest in tax hikes on the high-income is not strictly punitive, but I am afraid they are a very small minority.

– Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 


Tags: Taxes


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