The Elusive 1%
Terms such as “millionaires,” “upper income earners,” “top 1%,” “wealthiest Americans” and other expressions used to describe the well-heeled in this country have become very politicized. Pundits often conflate income and net worth when talking about wealth distribution, and it is not at all clear who or what constitutes the 1% or who or what comprises the 99%.
One thing that is clear however is that the “haves” and the “have-nots” in the U.S. are becoming more polarized – politically, economically, educationally, socially and in terms of career mobility, social opportunity and income potential. The causes of this trend are complex, and we need to be careful about calling for broad-brush solutions, such as tax rate increases on the wealthy, to reverse it.
According to an article in The Economist, Hunting the Rich (September 24-30, 2011), “The richest 1% of Americans pay more than a quarter of all federal taxes and fully 40% of income taxes while taking less than 20% of pre-tax income.”
The question of whether to take a bigger tax bite from the wealthy is not a question of fairness or “simple math” as President Obama has stated. The issue is fraught with basic philosophical disagreements about the right size of government and government’s role in re-distributing wealth.
Higher taxes on millionaires and billionaires alone will not solve America’s deficit problem. What’s more, high marginal tax rates discourage entrepreneurship, job creation and the type of risk-taking that stimulates economic growth.
That said, tax revenues in America are comparatively low after years of rate reductions, and some adjustments are necessary. In my opinion, the way to do this is not by raising the tax rate but by making the tax code more efficient. The U.S. tax code is notoriously byzantine and overly complex. In Europe, tax systems are generally much simpler and much more efficient.
Since the main beneficiaries of a complex tax system are the wealthy due to their ability to employ creative tax strategies and expertise, tax code simplification would result in a greater tax burden on the rich but without discouraging entrepreneurship, risk-taking, business vibrancy and activities that lead to wealth creation and economic dynamism.