Taxes and the rich

Paying for it

by W.W. | IOWA CITY

IN A sometimes feisty stump speech last Friday at a Roanoke, Virginia fire station, Barack Obama proposed to "ask for the wealthy to pay a little bit more" in taxes—to "give something back"—on the grounds that "if you’ve been successful, you didn’t get there on your own" because others have "helped to create this unbelievable American system that we have that allowed you to thrive".
Now, I would not say, as the apoplectic Rush Limbaugh has, that "I think it can now be said, without equivocation—without equivocation—that this man hates this country." I would say, without equivocation, that Mr Obama is a patriot who sometimes makes demagogic arguments about taxes. In the interests of fairness, let's go first to the transcript:

There are a lot of wealthy, successful Americans who agree with me—because they want to give something back. They know they didn’t—look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else.  Let me tell you something—there are a whole bunch of hardworking people out there.
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen. The internet didn’t get invented on its own. Government research created the internet so that all the companies could make money off the internet.
The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together. There are some things, just like fighting fires, we don’t do on our own. I mean, imagine if everybody had their own fire service. That would be a hard way to organize fighting fires.
So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill.  That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the internet. That’s how we sent a man to the moon. We rise or fall together as one nation and as one people, and that’s the reason I’m running for president—because I still believe in that idea. You’re not on your own, we’re in this together.

Most right-leaning commentators have fixed on Mr Obama's claim that "If you've got a business—you didn't build that. Somebody else made that happen." This is certainly a confusing and tin-eared way to make the point, but it's clear in context that the substance of Mr Obama's point is mostly unobjectionable. Building a successful business in an advanced capitalist economy presupposes the existence of a certain physical and institutional infrastructure that no individual could possibly provide on his or her own. There's no disputing this.
However, there are serious questions about whether all the underlying public goods that make modern business possible must be provided by government and financed with taxes. Education, roads, bridges, and fire protection are routinely financed privately. If most, or even many, of these goods are better provided privately, Mr Obama's "we're in this together" argument for higher top tax rates may be a non-starter. Of course we're in it together! Yet it remains unclear that government-financed 2, much less NASA's moon boondoggle, represent the perfection of productive "in-it-together" public spirit. Aaron Ross Powell of the Cato Institute makes the free-market argument:

The argument against paying more taxes or creating more federal programs is not that we all should keep our money even if it means accomplishing nothing and having no nice things. Rather it’s that if we kept our money and had fewer federal programs, we’d accomplish more and have more nice things. Without the state stifling innovation, hindering entrepreneurs, wasting resources, and crowding out private action, we would get even more done together.

Maybe so. But let's suppose for the sake of argument that it's best if government provides the public goods business needs to become a viable and successful enterprise. Even in that case, Mr Obama's conclusion, that the rich ought to pay more in taxes, does not follow. As it stands, high-earners do "give something back": 35% of yearly income. But that's just to the feds. Here in Iowa, they pay an additional 9% to the state. Maybe it's just me, but that seems like a lot! According to the Tax Foundation, in 2008 "[t]he top 5 percent earned 31.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes". If that's not giving something back, what is?
In this light, it's easy to see why Mr Obama's observation that it takes a village to make a fortune is in one respect irrelevant and in another offensive. It is irrelevant because the class of people Mr Obama wants to "give back" has already paid most of the tab, and continues to pay most of the tab, for the tax-financed public goods upon which they, and the rest of us, so crucially depend. At the federal level, the top 10% percent of the distribution paid over 70% of income taxes in 2009 (again, according to the Tax Foundation). Mr Obama's in-it-together point is mildly offensive in context because it is used to imply that top-earners who resist paying an even larger portion of America's tab do so only because they are in the grip of an absurd myth of self-reliance.
Together with a bit of simple democratic mathematics, the facts about the portion of tax revenue contributed by the rich plausibly suggest that they pay more than their fair share for the infrastructure of capitalism. The rich have money, which can buy political influence. But the middle class have votes, which in a democracy is influence. So it's not surprising that the public goods upon which the middle class equally depends are financed disproportionately by the wealthy. Of course, no one ever got elected by identifying middle-income voters as the free-riding class. Asking the minority who already finances rather more than most government expenditure to "give something back", as if it were currently skating by unfairly on the more open-handed spirit of the less privileged, is plain, old-fashioned demagoguery. That's only to be expected, but it's healthy to see it for what it is.
Anyway, it's not the infrastructure of American capitalism that's busting the budget, is it? Our fiscal strain is largely a matter of buying health-care for old people. The health and longevity of America's elderly is an admirable and humane goal, but it's not part of the vital infrastructure of business.
None of this is to say that the top tax rate should not rise. There may be other, better, reasons to stick it to the rich. Perhaps the general welfare would be advanced if government took and spent more of the wealthy's money. Perhaps reducing income inequality would by itself improve the quality of our democratic institutions or reduce the risk of a socially destabilising sense of exploitation and stratification. Perhaps. But Mr Obama's notion that the rich get more out of our common institutions than they put in is questionable, to say the least. And his suggestion that opposition to higher top income-tax rates could only be based on by-the-bootstraps social atomism is a silly bit of bad faith.