Should Taxes be Raised on Wealthy People?

Not surprisingly, there has been a great deal of debate about raising personal income taxes on people who earn more than $250,000 per year. The support and opposition have broken on political party lines. As a person who clearly would be subject to higher tax rates, were a tax reform law to pass, I wanted to weigh in on this subject.

I do not believe we can solve the deficit problem without raising taxes. I also do not think that all tax increases on wealthier people are inherently bad. I do not think the proposed tax rates are inherently bad relative to their effect on economic growth. Furthermore, although I think we have a certain amount of “crony capitalism” in our country at all levels, money that gets redirected from the general public to a few favored corporate and union welfare systems, I think a certain amount of that will happen in any democract.

However, I have three fundamental issues with our tax system:

  • Everyone should pay income taxes, except for the very poorest members of our society, and, for them, only for the period of time in which they remain below the federal poverty level. Today, over 50% of Americans pay no income taxes. That is wrong. It disconnects over half of Americans from any economic stake in how income tax dollars are spent. It has the psychological effect of deluding those not paying taxes that money will always be available from “the rich.” Everyone should pay something.
  • We need far tighter controls on how our tax dollars are spent. I understand that, in a democracy, some uses of our tax dollars will go to causes that I would not personally support. The majority of the voting public should help guide elected officials on the allocation of tax revenues.
  • We need much more common sense in the way governments account for what they are spending, and what the long-term costs of that spending might be. The whole issue of excessive retirement benefits has arisen because governments have hidden the long-term costs of these retirement obligations by using accounting rules that were prohibited for private businesses over two decades ago. The Congressional Budget Office “scoring” of legislation is fundamentally flawed in two respects: first, it limits its evaluation to the ten-year period after the law is passed; and, second, it does not take into account the highly likely behavioral responses to a piece of legislation. For example, any tax increase on businesses headquartered in the United States will cause some businesses to shut down U.S. operations and move investments and jobs abroad. That kind of highly likely reaction to a tax increase is not factored into the CBO scoring model at all, even though any common sense evaluation of a tax law would take it into account.

However, at all levels of government, but particularly at the state and local level, taxes and bond proceeds are solicited for one purpose, and diverted from a completely different one, usually the enrichment of union leaders and other state employees. When Connecticut created a fund for transportation improvements in 1984, most Connecticut residents would gladly support tax increases to upgrade our badly maintained transportation system. However, year after year, the Special Transportation Fund has been raided for “general revenues,” which is a euphemism for paying rich retirement benefits to state employees.

Similarly, Connecticut established a fund for smoking cessation programs when it received a major settlement from the tobacco companies in 1998. It has never used a penny from that fund for its intended purpose. Every year, the fund has been raided for “general revenues.”

Connecticut is not alone in this regard. Diversion of funds from one budget line item to others is a regular practice of many states and localities, as noted in the Monday, November 14, 2011, issue of The Wall Street Journal, in an article entitled “Cities Hit as Funds From Bonds Pay Other Bills.” In that article, reports Ianthe Jeanne Dugan, Justin Scheck and Bobby White recount many examples of cities like Miami that routinely divert funds from their intended purposes. The reporters stated:

“Cities and states across the country are using money designated for specific purposes—such as fixing roads or sewers—in order to fill financial holes elsewhere, according to public officials and records.”

We cannot allow governments at any level to use these “bait-and-switch” tactics, which, if used by large public companies, would subject them to SEC fines and penalties and investor lawsuits.

Governments need to clean up their acts before I feel comfortable with tax increases on anyone. This is not about dissatisfaction with uses of public money with which I disagree; it is about corrupt and dishonest uses of public money.

Finally, I believe all of us should know how our money will be spent and what the consequences of a particular government spending decision would be. The projections and predictions about government spending are so flawed, as has been seen in the retirement benefits area, that I do not feel confident that we are getting the straight story. This is not a result of dishonesty, unlike the fund diversion issue; it is just bad accounting.

For all these reasons, I would like to see some fundamental changes made in our taxing and spending policies before I would support any tax increases at any level. At that point, I would be very comfortable paying my fair share of taxes.