Should We Double the Tax Rate on the Rich?

We live in a sound-bite political culture. Politicos and policy makers hardly ever engage their opposite numbers in anything close to real debate. Instead, they inflict upon us carefully rehearsed talking points. And the rest of us usually don’t particularly mind — because we’re not paying much attention anyway. We’re not paying attention because the talking heads are seldom speaking to ideas bold enough to move us. Still, every once in a while a real debate, on an absorbing question, does break out. Then we realize what we’re missing.

One of those rare moments began last week, in a formal — and fascinating — online debate [1] that will end this Wednesday. The host: the Economist, the prestigious British business magazine, The proposition before the house: that “the rich should pay higher taxes.”

The Economist has invited two sparklers to do the debating. Arguing the affirmative: French economist Thomas Piketty, whose work has traced the income explosion at the top of the U.S. economic ladder. His challenger: Chris Edwards, a former senior economist with the congressional Joint Economic Committee now with the Cato Institute, a leading conservative think tank in Washington, D.C.

The debate is following the classic format: opening statements, rebuttals, closings. But the Economist has also thrown in some cyberspace wrinkles. Guest experts are commenting on the debate’s exchanges, and readers can join in to the discussion — and vote for and against the proposition.

The sum total of all this: the “richest” exchange on taxing the rich in years.

And this exchange, notes [2] Economist debate moderator Saugato Datta, could hardly be more timely. With the world in economic crisis — and America’s top 0.1 percent taking in four times more of U.S. income than they did a generation ago — even those who consider inequality a “necessary price” to pay for a system that “rewards success,” says Datta, are “asking whether matters have got out of hand.”

To get things in hand, Thomas Piketty proposed [2] Tuesday, in his debate opener, an 80 percent top tax rate on all income over 1 million euros, or $1.3 million. This 80 percent rate — twice the top rate that President Obama is now proposing — rests on a historical foundation. Between 1932 and 1980, the top U.S. tax rate averaged 80.2 percent.  

A rate that high today, argues Chris Edwards, “would be disastrous.” The nation's highest-income taxpayers would reduce their “work effort.”Overall output and tax revenue would quickly plummet. Edwards, to give a sense of the enormous losses he feels Piketty’s tax hike would generate, goes on [2] to cite calculations by former White House Council of Economic Advisers chair Martin Feldstein.

Back in 1993, Piketty responds [1], Feldstein applied his theoretical perspective to Bill Clinton’s proposed top tax rate increase — from 31 to 39.6 percent — and predicted a substantial drop in taxable income if Clinton’s hike went into effect. No dropoff actually took place, a detail that didn't stop the Bush White House from getting the top tax-bracket tax rate dropped to its current 35 percent in 2001.

The most gripping exchanges between Piketty and Edwards, overall, have so far revolved more around basic philosophical assumptions about the nature of work and reward than questions over how well economic theories can explain actual economic behavior

Taxpayers in the highest-income brackets, Edwards contends [1], generate their high incomes “by their own efforts.” They produce “items of value to others.” Exceptions — “high-earning CEOs who perform poorly” — do exist, he acknowledges, “but it doesn't make economic sense to impose exorbitant tax rates because of the exceptions.”

The income most of us make, Piketty concedes, does reflect the contribution we make “to total economic output.” But this link between productive effort and economic reward breaks down at our economic summit, where top-earners like CEOs have the power to skim off whatever they can grab.

Top execs “will keep setting their own pay to the highest possible levels,” Piketty contends, “as long as they are not prevented to do so.” How can we do this preventing? History suggests, he answers, “that highly progressive taxation on very high incomes is the most efficient way to achieve this goal.”

High taxes on high incomes, Piketty adds, can “curb the grabbing hand.”

But it we let government grab too much in taxes from the rich, retorts Edwards, we will have started ourselves down a slippery slope to tyranny.

“The government that persecutes certain people with 80 percent tax rates,” he charges, “will find it much easier to expropriate the property of other groups it deems to be a menace.”

[3]And even if this nightmare should not materialize, Edwards holds, high taxes on high incomes still make “no sense” because rich entrepreneurs remain far “more likely to use the cash productively than the government.”

That argument — that the private sector always knows best — may not be resonating particularly well in our epoch of meltdown and Madoff, even among the Economist’s business-oriented readership. As of this past weekend, readers, by a 52 to 48 percent margin, were favoring the Piketty position.

Piketty and Edwards will file [4] their closing arguments this coming Wednesday. The Economist will pronounce a winner Friday.

In one sense, the Economist’s official choice won’t matter. By having the opportunity, at long last, to debate the wisdom of really taxing the rich, our body politic has won already.

Sam Pizzigati edits Too Much [5], the online weekly on excess and inequality.