Revisit: Why Taxing The Rich Will Save The Economy

Back in September 2011, I wrote a bit about how we should tax the rich in order to save the economy. I still think that's a good idea, but there are other issues that are out there which need to be addressed, too, and I think I know how to do that. Whether anyone in power has the will to do it (which is like saying whether there are belly dancers on Mars) remains to be seen, but my idea is relatively simple, addressing complex issues in what I think is a realistic and workable manner.

The plan is this:

1. Impose a surcharge on the top 20% of income earners so that they, collectively, pay off the national debt, plus today's interest on that debt, over a 5 year period.

2. Reduce taxes on the bottom 80% of income earners by the amount of that interest payment.

3. Remove the maximum taxable income cap on social security.

This will result in a massive transfer of wealth from the wealthy to the rest of us. I realize how socialist this sounds, but bear with me for a bit while I explain how this will work both short and long-term.

First of all, paying off the debt entirely has a multitude of impacts across the financial spectrum. We can buy back our debt (much of the debt is actually bought by the government), meaning the government gets more money to use almost immediately through that investment (preferably to fund education at the collegiate level).

The credit rating of the United States will go way up because there is a viable plan to fund repayment of the debt. We won't have to worry about raising the debt ceiling cap ever again, assuming Congress acts wisely and doesn't spend more than it takes in again. (As if that's going to happen, but that is down a much longer road). The value of the dollar starts to stabilize and grow against world currency, meaning oil gets cheaper. Part of the price of oil has to do with the value of the dollar rather than the oil itself. If the value of the dollar is high, the price of oil is lower.

That could have some negative effects on green tech development since money tends to be put into that only when the price of gas is high, but there will be these kinds of fluctuations in the economy as this plan is implemented. Also, the price of oil isn't going to go down that much since it's a finite resource and the straw is beginning to hit the bottom of the barrel there, so the overall impact may well be pretty low. With European markets being stupid, it's hard to say where the value of the dollar will head, but it can't hurt (except in American exports - which usually runs a gigantic deficit compared to imports) to have a strong dollar.

Still with me? Overall, it's a good thing to have a plan to get rid of the debt. The best thing about it is that we don't have to saddle our great-grandchildren with paying off OUR stupidity.

The reason it's done over 5 years is to reduce the detrimental effects of pulling that much money out of the economy. The wealthy invest rather than spend (see my previous blog for how that works), but if one pulls gigantic amounts of investment out of a company, the company tanks, followed by the economy if enough companies tank. A reduction of invested capital over five years which amounts to about 2% of their total wealth should reduce that impact.

And that doesn't include any potential GAINS a rebounded economy may have.

The second point there is basically letting the people get money to spend. The top 20% don't spend ENOUGH to make a difference in demand. The bottom 80% certainly do. By transferring that amount from them (through shifting the tax burden back onto the wealthy who can best afford it) to the people who spend that money, the economy is stimulated to a slight degree each year.

I don't want to over-state the case, because the interest owed on the debt today is about $200 billion dollars. That may seem like a lot, but to stimulate the U.S. economy, it will take a lot more than that. However there is another component to stimulating the economy - or at least getting people to spend their money. That is the attitude of the people toward the economy.

Even if the economy shows all the"on-paper" indications of health, if the people think times are bad, they don't spend as much. Previous stimulus packages were one-time tax breaks. One-time infusions don't create the kind of attitude boost a permanent tax cut can create. Permanent means the extra money will always be there, even if that extra money isn't a lot. Extra money will be spent, even if people save it (which in itself will help strengthen the economy and ease up credit for businesses and start-ups).

And over 5 years, that mounts to one trillion dollars of spending power. THAT is a lot of spending power. Toss on the positive effects of tax cuts for the POOR (instead of the wealthy as is usually the case) and you get a much brighter picture.

Finally, the thing about social security is that we don't tax everyone ENOUGH. Shortfalls are expected very soon and they will grow as the large minority of the population - the baby boomers - age. So cut out the cap.

No, the wealthy don't need social security. I agree. But without a lot of us minions supporting their wealthy life-styles, their wealth would never have happened.

Is it taking money from the rich and giving it to the poor? Yes.
Do I have a problem with that? No.
Is it unfair for the rich? Not really.

Without a hell of a lot of poor people, they wouldn't be rich in the first place. It's time to pay that back once these poor can no longer work, or have reached the age where they shouldn't have to continue to work so stay in cat food and kitty litter.

It's called being humane.

The amount of new funds coming in should be sufficient to fund social security for the foreseeable future. The wealthy may not LIKE it, and call it welfare, but their lifestyles are supported by those people. Those people paid into it, too, and they didn't get the lion's share of their income exempted from it.

The most important point in this is that the wealthy can AFFORD TO DO IT. An extreme example is that the SIX family members of Walmart founder Sam Walton, between them, have more wealth than the combined wealth of 90 MILLION of the poorest Americans. It takes the combined wealth of the next 2.1 million richer Americans to equal it. (Their wealth is equal to the wealth of the poorest 30% of Americans, with a population of 307 million people, that means these six people have the same total wealth as the poorest 92.1 million Americans do combined.)

They will not miss meals, worry about whether they'll have a roof over their heads or wonder if they can buy clothes for their kids. They may not be living as large as they might want to, but the inconveniences will be comparatively nonexistent to the troubles facing the vast majority of Americans. And it's not as if they'll lose their money in the long-run.

Longer-term the wealthy will do fine. As the economy grows, so, too, will their fortunes. It may not grow as much as it would have had the economy recovered like that on its own, but indications are that the economy won't be stimulated enough to do that on its own now. So the upshot is that the wealthy will pay a lot to get a lot more, or they pay nothing and get a lot less. My bet is once it's explained that this surcharge is a one-time thing, that funding social security will also help the economy and that both will stimulate the economy generating greater wealth for them in the long-run, they may be a lot more willing to come on board for it. If they think of it as an investment in the future, rather than a burden, they'll be in a much better frame of mind.

In short, everyone wins in the end. That's the kind of solution to a problem I like.