A Poor Argument for Raising Taxes on the Rich

As the debate for whether or not to extend the Bush tax cuts for the rich carries on through Congress' lame duck session, economists continue to weigh in. This week, a particularly weak argument against the extension was provided by economist Robert H. Frank from Cornell's Johnson School of Management. In a New York Times column, he essentially argues that it's okay to raise taxes on the rich, because it won't change their standard of living much. The latter part of that statement may be true, but it completely ignores the most substantive arguments of advocates for extending the cuts to the rich.

Frank begins his column with an anecdote about a friend who is exasperated about taxes rising for wealthier Americans. His friend worries it will lower the standard of living for folks making more than $250,000 per year. If this story is true, then perhaps Frank has found the only guy in the U.S. who has this as his chief concern. After all, not many people are worried about wealthy Americans being forced to buy a Mercedes E-class instead of an S-class.

Instead, most of those who express legitimate worry about raising taxes on the rich are more concerned with the effect it may have on everybody else. For example, if wealthy Americans have lower after-tax income, then they'll spend less money on goods and services, buy fewer stocks and bonds, and/or invest less money in the businesses they own. That's a particularly dangerous combination for an economy struggling to recover from a deep recession.

Oddly, Frank's column does nothing to deny any of this; indeed, he inadvertently adds fuel to these fears. Although he says some very rich families wouldn't have to alter their spending, he adds:

Many families with income of $250,000 and more do spend everything they earn, and, of course, would have to cut back.

This is precisely the sort of jolt the weak recovery does not need. Meanwhile, I would add, those other wealthy families that wouldn't have to spend less would instead have less money to invest and save, actions which would otherwise have very positive effects on the economy. He goes on:

If the top tax rate were to rise, as scheduled, from 35 percent to 39.5 percent -- its level during the Clinton era -- many top earners would spend a little less on cars and parties, so the standards that define their expectations would adjust. But once the dust settled, their cars would feel no less spirited, and their celebrations no less special, than before.

So, those wealthy Americans would not have to endure grave emotional harm if they could only spend $150,000 on a wedding instead of $200,000. Again, however, few people are really arguing otherwise. Instead, some more legitimately wonder if that additional $50,000 would really be spent to more effectively benefit the U.S. economy by the government than the by the vendors who would have made more money on the wedding.

In the long-run, it's fairly plausible that taxes will have to rise across-the-board in order to grapple with the deficit problem in the U.S. But raising taxes has a cost, as it will likely deprive the economy from some future growth. While Frank is correct that this is both necessary, and probably not a huge problem for wealthy Americans' standard of living, many of those arguing for a temporary extension for the rich would agree. Instead, they worry about the effect raising taxes on the rich in this economic climate will have on everyone else, not the damage it could inflict on the fragile ego of the bride of a wealthy hedge fund manager.