Tax the Rich?

Interesting “Ted Talk”: should we tax the rich

The speaker argues that, yes, we should. He really attacks the theory that the rich are job creators by advancing a pretty simple Keyensian argument: that what really matters in an economy is aggregate demand. When consumers demand things, then businesses can hire people, which in turn feeds consumer demand. The rich don’t spend that much, they mostly save, and so it would be better to put this money either into the pockets of poorer people, or into public services that benefit poor and middle class Americans. He argues that this isn’t going to reduce “jobs” because more people will be spending, and that will induce businesses to hire more.

A few comments.
1. This is not even close to a remotely new idea. Why not have an actual economist like Paul Krugman on TED? For some
reason, Keynes seems more risqué when coming from the mouth of a capitalist, I guess.


2.The big problem here is that It assumes that “low aggregate demand” is the cause of unemployment. That is just a theory. There are lots of economists who argue unemployment is caused by structural factors: a mismatch between the skills in the economy and the technology that is out there. In the structural story, you need entrepreneurs to come along and use this new labour for something. Jobs are not created, but “discovered”. And, in this climate you don’t want high taxes on capital gains to deter potential investors. You want to make it easier for business people to do business.

3. It assumes that fiscal policy can increase demand, and therefore jobs. Once again, there is tones of economic literature on this and it’s not clear that things work this way in practice.

4. Ignores many “micro” effects of taxation on peoples behaviour.

5.Assumes the government will act in a benign manner. But governments are not perfect and they respond to political incentives.

Overall, the talk does a good job of conveying the idea in 5 minutes. But it’s an overly simplistic idea, it’s not new or really that innovative, and it’s not without its problems.

Why don’ t we tax bad behaviour? (as opposed to good behaviour?)

Taxation has a redistributive function, namely to pay for government operations, programs, transfers among people; but, it can be used as policy tool to curb bad behaviour and reduce ‘negative externalities’. Taxes on alcohol and tobacco are examples of taxation designed, partially, to mitigate bad behaviour. The first use of taxation is something that left wingers generally support. The second is one that those on the right tend to find more acceptable. A sensible general heuristic for government taxation is as follows: if you want more of a good or service than the market will provide, then you subsidize it; if you want less, tax it. The first is more concerned with generating revenue; the second, with ensuring that policies don’t disrupt market-based incentives.


Can we somehow combine this heuristic with the need to pay for the costs of government? If so, it makes no sense to tax income. Income is the result of hard work, education etc.. Therefore, an income tax is a tax on a ‘good behaviour, namely, ‘working’. We shouldn’t punish desirable behaviour with taxation because, we'll get less of it. Why not just replace income taxes, which punish good behaviour, with excise taxes on socially and economically undesirable activity. So, instead of taxing income and investment (capital gains), we heavily tax a wide range of undesirable behaviours with negative externalities such as pollution, carbon emissions, religion, alcohol, tobacco, drugs, liberal-arts degrees, sugar, cable TV, celebrity magazines, meat etc… I’m sure we can think of more. This would have the advantage of reducing the prevailance of costly bad behaviour. We would also stop discourging good behaviour (working), and because there are lots of bad things we could potentially tax, it might also generate enough revenue to pay for the costs of government.

The Car ...

In defense of the automobile:

I am making a strong claim. Automobility is not just something for which people in their ingenuity or idiosyncrasy might happen to hanker. Rather, automobile transport is a good for people in virtue of its intrinsic features. Because automobility is a mode of extending the scope and magnitude of self-direction, it is worthwhile. Moreover, the value of automobility is strongly complementary to other core values of our culture, such as freedom of association, pursuit of knowledge, economic advancement, privacy, even the expression of religious commitments and love. If these contentions are even partially cogent, then opponents of the automobile must take on and surmount a stronger burden of proof than they have heretofore acknowledged; for they must show not only that instrumental costs of marginal automobile usage outweigh the benefits, but they also must additionally establish that these costs outweigh the inherent good of the exercise of free mobility. That heightened burden will be difficult indeed to satisfy.