In Defense of the Rich
During a scene in “The Sound of Music,” Max, the talent agent, is enjoying himself at Captain von Trapp’s estate, and declares with some satisfaction: “I like rich people. I like the way they live. I like the way I live when I’m with them.”
That’s one take on the wealthy that perhaps some of us secretly share to one degree or another. However, such views also can be manipulated into a cartoonish portrayal of the idle rich, and be used to foster envy and class warfare.
As an economist, I like rich people because of what they do for the economy. That is, no matter how they accumulated their wealth – whether by being an entrepreneur or by inheriting dear old daddy’s money – the rich have to do something with their resources.
Some might be venture capitalists, and invest in new ideas, inventions, innovations and/or start-ups. As a result, the economy grows, jobs are created, and consumers see new or improved products and services.
Others might simply invest in more established businesses through equity or debt markets. Of course, this too has beneficial effects for the economy by helping to provide liquid capital markets where firms can raise funds to expand or improve efficiency.
In addition, various wealthy people give funds to good causes, such as churches or charities that help the poor.
But what about the wealthy who spend lavishly on trips, cars, yachts and mansions? Some observers might judge this to be wasteful, calling it conspicuous consumption. Well, from an economist’s standpoint, there are benefits to such spending. After all, countless businesses and their employees provide travel services, manufacture expensive cars, build large yachts, and erect mansions.
How about imposing some hefty taxes on the wealthy, as various class warriors suggest? Don’t progressive income taxes make sense? And why not tax estates and luxury items too?
Well, the U.S. has had a progressive tax system for almost a century now. When the income tax was first levied, the highest rate registered 7 percent. At times, the top rate actually exceeded 90 percent. With the tax cut passed by Congress and signed into law late last month by President Bush, the top rate will register 35 percent.
With a progressive income tax, higher rates of taxation at higher levels of income wind up discouraging working, saving, investing and risk taking. Of course, that’s bad for the economy. Likewise, death taxes can reduce investment, hurt businesses, and restrain job creation. Meanwhile, taxes on luxury goods merely shift the consumption patterns of the wealthy – perhaps to outside the country – while inflicting real harm on the businesses and workers who produce such goods. We saw that when a federal luxury tax was imposed in 1990, and as a result, the businesses and craftsmen who built yachts in the U.S. were hit hard.
Still, there are some wealthy individuals who like high and progressive tax rates. For example, a small group of rich people called “Responsible Wealth,” which is a project of something called “United for a Fair Economy,” fought against this year’s tax cut, calling instead for “a moratorium on consideration of tax cuts by Congress.” They also want to stop Congress from permanently eliminating the death tax.
Of course, you’re always going to have left-wing wealthy people who might understand their particular businesses quite well, but fail to grasp how the economy works or the critical role that wealth plays in our economic system.
Many of these people no doubt feel like they don’t need all the money they have – perhaps experiencing some liberal guilt – and see benefits to handing large amounts of money over to the government. However, they also don’t understand the inherent incentives for waste in government. In the end, wealthy people are going to do far more productive things with their funds than will government bureaucrats.
So, maybe some rich people don’t feel like they need lower taxes. However, the economy and the rest of us need the investing, risk taking and consumption that result from lowering taxes on the well-to-do.
