Why Taxing the Rich Will Save the US Economy

I'm not in favor of tax and spend politics. I'm not in favor of increasing taxes just to spend it on social programs. But one can just revamp the taxes without increasing tax revenue and still get the economy going. The Government playing Robin Hood may not be such a bad idea, but it's not exactly giving money to the poor. It's more like making the rich pay their fair share while the the poor are pretty much left to their own devices.

(If you think being poor is simple, go to Spent and play a game or ten. Bet you starve.)

"Tax and spend" is a phrase used by conservatives to imply that the government increases taxes to create social programs to give extra money to the poor without any expectations. Often times, it means spending more than is taxed. And that is the context in which I'm against Tax and Spend. I want some value for my tax dollars being increased. But in this case, I don't want any increases unless they are specifically budgeted for deficit reduction. Rather, I'm looking at a shifting of the tax burden away from the poor and middle class and onto those who can most afford it: the wealthy. A shift of the tax burden will reduce the deficit (by stimulating the economy) without increasing tax revenue or adding to the deficit and without increasing or creating new "welfare" programs.

As I have mentioned, in the last 20 years or so (ever since 1990), we have seen the biggest a shift of revenue from the poor to the rich in global history. This gap between the Haves and the Have Nots was mentioned here earlier this month.

The idea has been floated that we should start taxing the rich more than we have and I agree - to a point. Tax the rich, yes, but no more than we actually need given necessary cost-cutting and fiscal responsibility. Then cut the taxes on the rest of us. We don't NEED to generate more tax revenue. We heed to shift the tax burden from the middle class and poor to the rich. Just doing that will stimulate the economy and make things better for EVERYONE.

Now, before we go much further, I have to explain how an economy works. You don't need to take notes and keep in mind, this is a thumb-nail version of the thing.

In the beginning there was barter. People would trade goods and services for goods or services. But there was an inherent inequity in barter in that some goods given seemed to be more valuable than what was received. So the concept of money was created. In essence, money placed a quantitative number to the value of things - be they goods or services. It worked so well, that money became what we use to trade for goods and services today.

But money has a problem. In ourt modern society, those who don't have money must acquire it in order to acquire the goods and services they need to live. They do this by trading their labor or talents in exchange for money. We call this work. A person who has the need of their labors (usually someone who is engaged in the manufacturing and sale of goods and/or services) hires people to trade their labors for his money.

All is well and good.

But some people have more money than they can spend in one spree. For a very long time, they kept this money (and other valuables) in their homes, but this became impractical. So banks were created. Banks operate as repositories of your money, who then use that money to sponsor other ventures with the expectation of being paid back with "interest", which creates an income for the bank so they can operate without paying themselves with the money of the depositors.

Again, all is well and good.

In an ideal economy, people labor for wages they spend on goods and services, the surplus of which they deposit in banks which use that money to loan to people or businesses who pay them back more than they were loaned in order to acquire goods needed in their lives, the excess of which is used to pay for the operation of the banks and offer a small incentive to the depositors for the privilege of using their money in the first place. As long as people are working, getting wages, spending wages and depositing excess wages in banks, things get better for everyone.

But then we have human nature to deal with and the major one here is greed. The greed is everywhere. The depositor who deposits their money wants the little extra the banks offer. The banks want more depositors because if they can make more loans, they make more money when people pay the loans back (Emphasis added for later effect). People getting loans want to get the loans, so can lie or fake the information necessary to get the loans if they're greedy, or find a banker who will give them a loan even if it can't be paid back because the bank looks at its income not so much as what is coming in NOW, but what WILL come in later. And the business owners are greedy realizing that if they can make their minions do more work for less wages, the business owner can make more money.

All of this has happened already. Hence why the world is screwed up. Going back to our model, the banks gave away loans to people who shouldn't have gotten them, meaning they have no income and no money to lend, and no money to give back to the depositors. (The FDIC isn't there for nothing, you know, but it, too, is running out of money). With no money coming in for businesses, they can't expand their operations or, occasionally pay their workers. So they lay the workers off. Fewer workers means less wages for the labors being traded, which means fewer people buying goods or services which means less business which means more workers are laid off.

But the bankers got paid. The business owners got paid. The poor don't. The middle class struggles.

From our (overly simplistic, but still relevant) economic model, we see where the money went: To business owners and bankers. In our society today, we call them "the wealthy".

Now, taxes were never mentioned in our economic model, but let's toss them in now and see how it all works out.

The government is in charge of maintaining the military, the roads, sewers, bridges and other public works we rely on to go about our daily lives. It also provides a safety net for those who for whatever reason can't exchange their labors for wages. It is financed by a tax on the wages of the people who live in that country. Now, a little about the people who live in the country. We'll split them up into three groups: The Wealthy (top 20% who hold the money), the Middle Class - the 60% of people who have been hired by the wealthy to labor to produce goods and services for the wealthy - and the 20% Poor (which are those who usually work, but at jobs which do not pay much, or those who can't work for whatever reason.)

The top 20% of the wealthy control 85% of the TOTAL WEALTH. If the total wealth of the economy was a million coins and the total population was 1000, the 200 wealthiest would have 850,000 to split between them, 600 would have 149,000 and the bottom 200 would have 1000.

The Wealthy have 4250 coins each.
The Middle Class have 248 coins each.
The Poor have 50 coins each.

Okay, let's move back to our model and see how this works. In a good economy, people trade labor for wages because the business owners has a demand for their goods/services. The greater the demand, the more laborers are needed. If the demand falls, so, too, does the need for laborers, which in turn means fewer people getting wages which means less spending for goods/services. The flow of money through demand is what keeps the economy working. If the money stops flowing, usually through a lack of demand (cause in this case by low wages), the economy falters and fails.

There are only 200 rich. They have a lot of money, but how many goods or services can they buy? 200. Their spending power is gigantic, but the demand they generate is small. The Middle Class and Poor are gigantic in potential demand, but compared to the rich, on an individual basis, their spending power is poor. If they don't have the money, they can't spend it on the goods and services their demand may potentially be.

Back to taxes. The Wealthy pay a lot of taxes, but they also control most of the wealth of the nation. In our model, even if they pay the 33% they pay today, the amount they have left over is still an order or two of magnitude greater than it is for the Middle Class, who control nearly a magnitude of order more than the poor. And that money IS NOT FLOWING as it should in a healthy, working economy. Rather than using their wealth to reinvest into the economy by creating new jobs, investing in new industries and making new opportunities, they're holding on to it.

Greed.

The Middle Class and Poor are spending almost all of their money on the necessities of living. They can't get enough well paying jobs to be able to pump more into the economy.

So the shifting of wealth from the wealthy to the less wealthy is in order. Since the wealthy aren't doing that on their own, the government has to do it.

Now, I understand the wealthy pay a lot in taxes, but historically, they pay barely a third of what they used to have to pay. They control 85% of the wealth. They should be paying 85% of the taxes. They aren't.

Let's look at what the taxes does to the coins people have:
33% of 4250 = 1403 leaving 2847
15% of 248 = 37 leaving 211
10% of 50 =5 leaving 45.

Clearly, the rich remain substantially wealthier than the middle class. That 33% in taxes represents 35% of the total taxes collected today. The 15% in taxes represents 60% of the taxes collected. The 10% the Poor pays represents 5% of the taxes collected.

The rich still have 10 times the wealth of the middle class.

But let's remember what the middle class does: Spend. A little goes a long way. 60% of the taxes means there are a hell of a lot of middle class. A small increase in what each of them has translates to a gigantic spending potential. By shifting the tax burden 10% so the rich pay 45% of the taxes, the middle class 55% and the poor 0%, then 10% of the TOTAL INCOME TAX REVENUE is shifted to a large number of people who are willing to spend it, all this without in any way, shape or form decreasing the quality of life among the wealthy. Given that the wealthy control 85% of the wealth, this shift isn't what one would call onerous.

In 2009, the US collected 2.4 TRILLION dollars in tax revenue. 10% of that is 240 BILLION dollars. Imagine that 240 billion dollars, every year, being pumped into the economy in the form of spending or even savings (which helps generate revenue banks can use to make loans which stimulates business, investment and hiring) without adding to the deficit. The "Economic Incentive Plan" we got from the government was a one time tax bonus intended to have people go out and spend it to stimulate the economy. It didn't help much because the public perception was it's one-time only, the economy sucks, let's NOT spend it.

A major tax cut for the 80% of Americans who actually do the largest amount of spending would be seen as a positive step toward helping them. Doing that without actually increasing the deficit, nor adversely impacting those who will be shouldering a fairer share of the tax burden will be even better.

As has been mentioned, the gap between the rich and the poor and Middle Class has never been larger. A shift of wealth is in order. It will take the money from where it's been (stagnating while only enriching the rich) to stimulating the economy.

The infusion of cash into the middle class would most definitely create more spending power and more willingness to spend it. This would fuel demand for goods and services, which in turn fuels demand for workers, which in turn puts more money into the economy.

This is a redistribution of the tax burden. Taking it one step further, increasing the taxes on the rich to actually generate extra tax revenue could ALSO be done. This extra revenue could be used to reduce the national deficit as well as help fund emergency social programs like FEMA or even bolster Social Security. But what would be best is using the money to stimulate business by investing it in the things government is supposed to take care of: Infrastructure. Just creating those jobs to repair/maintain/build the vital infrastructure the nation needs to keep moving would put more money into the economy and improve the quality of life for everyone. Putting more people to work generates more jobs which generates wages which can be taxed increasing the amount of taxes being taken in which can be used to reduce the deficit and further stimulate the economy.

But it all starts with shifting some of the wealth away from the few wealthy to the many of the rest who are willing to spend it. That can only be done through re-balancing the tax structure to place far more of the total burden onto those who can most afford it and away from those who can least afford it.

While some in Congress (who, by the way, are among the "wealthy"), call this idea "Class Warfare", the fact is the wealthy will benefit from a shift in the tax burden just as much as the rest of us over the long term. They're just too greedy to see it.