Ever since the passing of the Tax Cuts and Jobs Act of 2017, there has been a contentious debate on whether or not the Trump tax cuts are doing any good. Some economists are saying that the latest tax cuts are running out of steam. Others are saying that the economy is on fire. And still, others say that the business investment boom that Trump promised us never materialized. It didn’t.
But whether or not the tax cuts are doing any good, we do know that the vast majority of the benefits from those tax cuts are going to the top one percent. We also know that many in the middle class are paying more in taxes now than they did before the tax cuts.
So let’s take a little walk down memory lane. Some of you might remember the debate in 2011 over the expiration of the Bush tax cuts enacted in 2001. Back then, we have heard from Warren Buffet, one of the most successful investors of our time, suggesting that we should let the tax cuts for the wealthiest among us, expire. We also saw a billionaire boys’ club of philanthropists forming, with pledges to give half their money away.
Perhaps those donations and pledges are a token offering of appeasement from billionaires to the middle class for what they did to the middle class to get where they are now. Or maybe not, since those billionaires are putting their money into foundations where the donations they made allow them to exert enormous influence over how those funds are spent. Or they may be waking up from the buzz of an addiction as I’ll explain later.
I bring all of this up because years ago, I read this very interesting article, “The United States of Inequality”, which discusses the question of whether or not income inequality creates unhappiness in America. Therein, we find the relevant part of an article by Timothy Noah of Slate Magazine where he comments on a point made by Arthur C. Brooks, president of the American Enterprise Institute. Brooks has said that income inequality doesn’t create unhappiness, and Noah responds:
“Living conditions improve over time. But people do not experience life as an interesting moment in the evolution of human societies. They experience it in the present and weigh their own experience against that of the living. Brooks cites (even though it contradicts his argument) a famous 1998 study by economists Sara Solnick (then at the University of Miami, now at the University of Vermont) and David Hemenway of the Harvard School of Public Health. Subjects were asked which they’d prefer: to earn $50,000 while knowing everyone else earned $25,000, or to earn $100,000 while knowing everyone else earned $200,000. Objectively speaking, $100,000 is twice as much as $50,000. Even so, 56 percent chose $50,000 if it meant that would put them on top rather than at the bottom. We are social creatures and establish our expectations relative to others.”
So the majority of people in that study would prefer to know that they make more money than others rather than to be satisfied knowing that what they have is more than enough to cover their expenses, even if others are making far more. That can probably be extrapolated to the general population without much controversy. That extrapolation would make sense since the need for social hierarchy seems to be hardwired into human brains. What this suggests is that what makes the top of the line Mercedes so appealing to a higher ranking human is that other people can’t have it, not just that one can have a very pretty car like everyone else, right?
To put this rat-race in perspective, this Letter To Cary on Salon magazine describes what it’s like to have everything you could ever want and still be unhappy. According to the author, he has attained his goals and acquired what he wanted: a house, a wife, a few cars, and plenty of money in the bank with good prospects for retirement. Yet, he’s unhappy and says he was happier when he had less. How could that be?
To summarize up to this point is this: humans seem to have a natural tendency to establish social order, and those that attain the highest levels of social order expect differentiation and exclusivity. It can also be shown that for many, getting everything they need and want means they need to show some initiative if they want to be entertained, even if they can pay for entertainment. They will have to make a choice to let what they have be enough. They will have to make a choice to be happy.
There is one more point to make about upper-income status before we move onto taxes. Consider the predicament of someone who has everything he has ever wanted, faces no real challenges from others in order to satisfy his needs (assuming he can identify and articulate them) and has time on his hands. What to do? What to do when making more than $75,000 a year doesn’t necessarily buy happiness?
If what we’ve witnessed in the financial crisis that gave rise to the Great Recession is any indication, the most popular choice of late is to take extraordinary risks regardless of what will happen to other people, using other people’s money. This risk-taking behavior may include acts that, if not illegal, are at least immoral. That would point most likely to investment firms like hedge funds, banks, and corporations. All of them use other people’s money as a platform for risk-taking, and boy, have they been paid handsomely for doing it. They have been paid their bonuses and salaries, and they have even received money from the government to cover their losses when they lost big time in 2008.
This is why the Bush tax cuts for the very wealthy needed to expire. This is why they didn’t need the Trump tax cut. This is why the stock market is giddy on talk of an interest rate cut from the Fed. Investors want the interest rate cut so that they can borrow money, make bank on the carried interest deduction, and increase their profit margins with lower rates when they buy stocks on borrowed money.
My point about higher taxes for the extremely wealthy is that the act of making money for the top 1% has become something more like an addiction rather than a necessity. It’s like they have developed a tolerance for money, just like an addict develops a tolerance for heroin, and the rush they used to get from making money doesn’t come anymore, so they need greater and greater rewards to get the same rush.
To get that same rush, they are willing to endure greater and greater risks, regardless of who else they might hurt. In this article about a major insider-trading probe — one of many, we see that some of the very wealthy in New York seem to think that insider trading is the norm and that they need to engage in it to get an advantage over everyone else. Competition at any cost appears to be their philosophy.
In case you haven’t heard already, insider trading is trading securities for a profit based on “inside” information on stocks that the public isn’t privy to. There is no risk to the investment because you know you’ll make money when others will miss it. But if you’re wealthy, you can entice the right people to give that information to you, for a reasonable fee. That fee is usually called a bribe. Getting caught with insider-trading is the only risk, and the people that do get caught are probably just the tip of the iceberg. Progressive tax rates would help to inhibit that kind of activity.
Taxes are imposed on things we don’t want, we want to discourage, or that require regulation. We don’t want the biggest financial institutions taking extraordinary risks with other people’s money, especially without adult supervision. These same institutions could take the rest of us down with them in their failure. They’ve done it before and they will do it again unless inhibited by some law that makes taking that risk too scary for them. Highly progressive tax rates would help to inhibit that kind of activity.
Does anyone remember Enron? Who was playing with fire there? Some were members of the top 1% club, and they were probably the psychopaths among us that Dr. Bob Hare talks about. Given all of those conditions, I’m not sure I want “trickle-down” economics even if it did work, but it doesn’t. Just ask Warren Buffet. Tax cuts don’t create jobs, as well as create tax havens.
Consider that the top marginal rates for income taxes are lower now than they have been in 90 years, which puts the last low point back in 1929 (seems familiar, doesn’t it?). Such low taxes have encouraged very wealthy people to take very great risks. And since 2008, we’ve seen the damage done by the addiction to the euphoria associated with making gigantic sums of money while taking great risks with other people’s money. We may not be able to stop all of it, but we can certainly discourage it with appropriate tax policies.
So, from an economic, sociological and psychological perspective, letting the Bush tax cuts expire for at least the top 1% makes perfect sense. Denying the top 1% the Trump Tax Cuts makes perfect sense. Unless you depend on the top 1% to get re-elected. It’s not like the top 1% have the greatest track record for efficiently allocating resources in this country despite any notion that they are leaders. These same leaders took great risks, lost their bets and then asked the government for help and got it (that’s what I mean by “other people’s money”). That’s leadership? They proved themselves wrong in 1929 and in 2008. Why should we reward them again with tax cuts?
Adapted from my original article published on my blog, The Digital Firehose, Tuesday, April 19, 2011. Updated for clarity, grammar and new insights with this edit, and some of the changes in politics since then.