–How much should the rich pay in taxes?

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor,
which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.


Recently, CNNMoney.com published an article titled, “How much should the rich pay in taxes?”

The data in the article are interesting, but the fundamental premise of the article is nonsense. Here are some excerpts:

How much should the rich pay in taxes?
By Jeanne Sahadi | CNNMoney.com – Thu, Aug 30, 2012

It’s a heated question these days. President Obama and his Republican challenger, Mitt Romney, spar over it bitterly. And the taxes Romney pays on his own vast wealth have become the subject of massive press attention. But the question is not so easily answered and depends on a number of hard-to-nail-down factors — starting with how you define rich.

“Virtually no one thinks of themselves as wealthy,” said Joseph Henchman, a policy analyst at the Tax Foundation. “They’re thinking about what others should pay in taxes.”

One frequently used definition of rich is the top 1% of federal tax filers — those with adjusted gross incomes of at least $343,927 in 2009.

They earned nearly 17% of all AGI in the country and paid more than a third (37%) of all federal income taxes collected by the government. The group’s average effective tax rate — AGI divided by income taxes paid — was 24%, more than twice the national average.

The top 0.1% — had an AGI of at least $1.43 million. They paid 17% of income taxes collected. But, some wealthy individuals pay little or nothing in federal income taxes because their income is from sources not included in AGI such as tax-free municipal bonds.

Federal income taxes, meanwhile, don’t reflect a household’s total federal tax burden. That leaves out things like payroll taxes, estate taxes and corporate taxes. The Tax Policy Center incorporates these broader views of income and tax burdens in its calculations. And it found that in 2009, people making more than $1 million in total income paid roughly 16% of all federal taxes in 2009.

Ultimately, there is no right answer about how much the rich should pay. A majority of Americans simply say “more.”

My guess: Most people would describe “rich” as anyone earning significantly more than they themselves earn, and “soaking the rich” always has been a great populist agenda, fueled by envy. Everyone enjoys seeing the rich get their comeuppance.

Policymakers will have to decide not only on a definition of rich, but also consider broader questions about the federal budget and economy. Questions such as: What do Americans want from their government and how much will it cost?

Here is where the article veers off track, because what Americans want from government has absolutely nothing to do with its cost. Apparently the author, Jeanne Sahadi, wrongly believes federal taxes pay for federal spending.

Yes, state taxes pay for state spending, and county taxes pay for county spending, and city taxes pay for city spending. The states, counties and cities are monetarily non-sovereign. But, federal taxes do not pay for federal spending. Even if federal taxes fell to $0, our Monetarily Sovereign federal government easily could double or triple its spending.

So if federal taxes don’t pay for federal spending, what purposes do they have? I can think of four:

1. To force social change. Cigarette and liquor taxes help reduce the purchase of cigarettes and liquor — a bit. Maybe.

2. To help close the gap between rich and poor, though this form of gap-closing would not help the poor; it only would hurt the rich. So at best, it’s a questionable strategy.

3. To force demand for U.S. dollars, which are necessary for paying taxes. However, there are sufficient state and local taxes to produce that effect. Federal taxes would be unnecessary.

4. To prevent/cure inflation, though this would be a very last resort in case no other prevention/cure worked. (I discuss this in more detail at Preventing and Curing Inflation: Modern Monetary Theory vs. Monetary Sovereignty. Using taxes to fight inflation trades one disaster for another, i.e. recession for inflation.)

In summary, #1 and #2 have some slight merit; #3 is unnecessary and #4 is unmanageable and dangerous.

What is the fair level of taxes on the rich relative to everyone else? And should the more than 40% of households with no federal income tax liability — thanks largely to tax breaks — be asked to pay something in income taxes as well?

“Fairness” always is an issue for which there can be no resolution. We discuss this at: “Which Taxes Are Fairest? Which Taxes are Least Fair?” (Summary: No taxes are fair; all are unfair; some are more unfair than others.)

In the end, any decision Washington makes about taxing the rich could affect the economy.

That actually is the central issue, though it is the least discussed. Economic growth, and measured by Gross Domestic Product (GDP) is calculated this way: GDP = Federal Spending + Non-federal Spending – Net Imports.

If we increase taxes on the rich, we reduce Non-federal spending, but do not increase Federal Spending. So increasing taxes on the rich absolutely, positively will result in a reduction in GDP growth, which will impact the non-rich more than the rich.

Any tax increase of any kind always, always, ALWAYS must have a negative effect on the economy. Period.

To stimulate the economy, and to reduce the gap between the rich and the poor, the first tax step is to reduce taxes on the non-rich. And that begins with eliminating the worst, most harmful, most useless tax America ever has known: FICA (see “Ten Reasons to Eliminate FICA”)

Increasing taxes on the rich is the classic, “Cutting off your nose to spite your face.” The right wing claims that raising taxes on the rich taxes the “job makers,” and to some degree they are correct. But the real problem is not in raising taxes on the rich; it is in raising taxes anyone.

Rodger Malcolm Mitchell
Monetary Sovereignty


Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


6 thoughts on “–How much should the rich pay in taxes?

  1. I agree with everything you say and prescribe but I doubt anything other then a very significant tax rise on the “rich” would have any demand effects.

    I make in the six figures and have had some significant local tax increases and my lifestyle has not been adjusted at all. My savings have though.

    But I agree that it is still pointless at the federal level and we would be better off understanding the system we live in.


  2. Your point number 2 – “To help close the gap between rich and poor, though this form of gap-closing would not help the poor; it only would hurt the rich. So at best, it’s a questionable strategy.”

    The book ‘The Spirit Level – Why more equal societies almost always do better’ by Wilkinson and Pickett explains in great detail why inequality is bad for everyone, rich and poor. You should read it.


  3. A lot of what you say is very true, but you ignore the most important for reason for high inheritance taxes and steeply progressive income taxation — democracy.

    Consider the following chain of reasoning:

    — Democracy exists to the extent that there are no material concentrations of power in the hands of a few.

    — Wealth is power, so concentration of wealth in the hands of a few concentrates power in the hands of a few.

    — Therfore, when there are high concentrations of wealth in a society, democracy is impaired or destroyed. You get oligarchy instead, or at the best you get timocracy.

    As Louis Brandeis famously said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

    So, whatever else may be said pro or con about taxing the rich heavily, we must do so merely to preserve democracy. There must be reasonable limits on how much wealth accumulation we allow by individuals, and of course, by corporations too.

    So we should tax the rich by way of rational social policy, and offset the money destroyed in this way by increasing federal spending. If this is “unfair”, then so be it. It is an unavoidable price of a stable democracy.

    By the way, similar reasoning applies to information, with the concentration of control of information being alike toxic to democracy. This is the fundamental argument against concentrating secrets in the hands of a few with a “need to know”. Our current national security apparatus taken over time, will destroy democracy.


    1. Agreed that a large gap between rich (the 1%) and not-rich (the 99%) diminishes Democracy. But the way to reduce the gap, while growing GDP is not to punish the 1%, but rather to reward the 99%.

      Increasing taxes on the 1% doesn’t work, because the 1% find ways to avoid high taxes. But if these taxes did work, they simply would pull dollars out of the economy, thereby hurting the 99%.

      What would work to reduce the gap? See the “Nine Steps to Prosperity,” just below my signature on the above post.


      1. Hi RMM: Your ideas are interesting. First, though, perhaps you missed my statement that we should …”offset the money destroyed in this way by increasing federal spending”, so there wouldn’t necessarily be any decrease in GDP.

        Beyond that, let’s talk about your approach to truing up the wealth gap. Mathematically, you are correct, there are two ways (or a combination of the two) to eliminate the difference between rich and poor. You would prefer to somehow create wealth at the bottom until it equals the top, leaving the top with its current wealth. This appears at first glance to be a very appealing approach, and it is often heard from both sides of the political spectrum. It is, however, only superficially attractive.

        As we examine the proposition, let us set aside for the moment the unliklihood that the enormous amount of additional wealth that would have to be created is possible. After all, the .1% is almost unimaginably more wealthy than the bottom. Just do the math.

        Also, we will ignore for the moment the unliklihood that the current top would stand for even this kind of truing up, Many of them are likely to accumulate even more, giving a moving standard for equality.

        We will also leave alone for now the horrible consumption of resources necessary to create the wealth needed.

        For now, let’s just talk about the nature of humans and of democracies.

        You advocate that we keep the top at the current level and bring up the bottom to equal status. But that would require a horrible destruction of human value, as distinct from wealth.

        Here’s why: You would have each individual accumulate and possess enormous wealth, that is up to the level of our current most wealthy. Anything materially short of that, and we have concentrations of power again. This is actually a sort of disguised return to the political situation where only the wealthy have real power, But in your version this time everyone is wealthy. And to maintain that democracy, every citizen would be downright obligated to “keep up with the Rothschilds”. Not to do so creates another political underclass. In your democracy, poor people would be the enemies of democracy.

        But what is the cost of all of this? It is actually a loss of the personal autonomy and freedom which is the very purpose of the political security which we seek in democracy. Wealth is only one of the values in a human life. But even if we leave aside the distraction from the other values (the good? the true? the beautiful?), the phrase “tyranny of wealth” is given a radical new meaning.

        No longer would our citizenship in a democracy be ours merely by virtue of our humanity. We would no longer be created equal, we would have to achieve a cruel equality dictated by a minimum standard of avarice.

        Luckily, there is another tyranny which will save us from your vision. It is called reality. There is only a vanishingly small probability that we would ever true up the gap between top and bottom by floating the bottom boats.

        As for “punishing the rich” by taxing them. I’m not so sure it is a punishment at all.


  4. Jerry,

    You said, “You advocate that we keep the top at the current level and bring up the bottom to equal status.”

    Not true, not possible, not necessary and not a wise goal. I said “reduce” the gap, not eliminate it.

    If you looked at the “Nine Steps to Prosperity,” you saw what I recommend.

    Also, you said, “Anything materially short of that [equal income], and we have concentrations of power again.” It seems, you favor the equal income you decry.

    I can envision no society in which everyone had the same amount of power. There always will be leaders and followers. My suggested goal is to reduce the gap between them, by raising the lower, rather than lowering the higher.

    This is the problem I hope America can address: http://www.washingtonpost.com/business/economy/poverty-was-flat-in-2011-percentage-without-health-insurance-fell/2012/09/12/0e04632c-fc29-11e1-8adc-499661afe377_story.html


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