If you need proof that being wealthy does not mean that you necessarily understand economics and public policy, consider a letter to President Barack Obama signed by a group of rich folks urging him to hike their taxes.
The letter proclaims: “For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you allow tax cuts on incomes over $1,000,000 to expire at the end of this year as scheduled. We make this request as loyal citizens who now or in the past earned an income of $1,000,000 per year or more.”
The group calls itself “Patriotic Millionaires for Fiscal Strength.” Does that mean that those opposing such tax increases are unpatriotic or less than loyal?
For good measure, billionaire investor Warren Buffett told ABC’s Christiane Amanpour in an interview aired on November 28: “I think that you should raise taxes on the very rich.”
Of course, one is tempted to say: Hey, if you think this is a good idea, then just cut a check to the government. But that misses the point.
Two questions must be addressed.
If truly concerned about economic growth, job creation, and yes, the fiscal strength of the nation, then does higher taxes on the wealthy make sense? The answer: Absolutely not.
It follows to ask: Why?
Quite simply, those resources are going to be used far more productively in the private sector than in the government.
In the public sector, decision-making is guided by political incentives. Power, the size of budgets and staffs, and special interest influence, coupled with a lack of price and profit signals and no ownership incentives, mean that waste dominates in government.
In contrast, the wealthy can do, basically, three things with their money in the private sector: save/invest, consume, or donate to charity. Any of these is preferable to handing more dollars over to the government.
Private saving/investment means more resources for entrepreneurs to start up and build businesses, to serve consumers, and to create jobs. And keep in mind that upper-income earners, by definition, are the people who have the resources to invest in new and expanding businesses. Indeed, capital accumulation plays a crucial role in economic growth and development.
Consumption obviously supports businesses and jobs of all kinds and types. And even if the consumption is of the conspicuous variety — such as buying a massive yacht or building an audacious home — many businesses and workers are involved in providing such products and related services.
Finally, charitable endeavors to help the poor or to boost education, for example, are worthy expenditures, with the added benefit that private charity has the incentive to truly get people on their feet or to improve schools, as opposed to government spending which tends to institutionalize and feed failure.
So, we’d all be much better off if people like Warren Buffett concentrated more on private investments and philanthropy, rather than lobbying for higher taxes. Indeed, as opposed to looking to raise taxes on the wealthy, investment, business, the economy and employment would benefit from reducing tax rates across the board, including lower tax rates on those who earn the most. The resulting economic growth, of course, would provide the foundation for true fiscal strength — though that also must include serious and substantial reductions in government spending.
In the end, one must wonder whether these high-tax millionaires are truly worried about economic and fiscal strength or are merely in love with big government.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.