Bravo Obama: Raise the Taxes

The other night one of my colleagues was watching the Democratic Convention with his nine-year-old son (the election fever here has even affected the youngest). The youngest boy was a big supporter of Barack Obama and admired his proposal of taxing the rich to help the poor, until his father asked him if he knew in what category he was located. Having learned with astonishment that he was situated among those whom Obama would define rich, his enthusiasm for the Democratic candidate vanished.

This naiveté is not only in children. The majority of citizens think that rich people are only the others. And being by definition the others, the more they think that it is sacrosanct to tax them. Especially if this succeeds at reducing the taxes of those, like them, who are not rich.

Unfortunately, as an economist, I do not enjoy this blessed ignorance. I know that I fall among those whom Obama defines as rich and I am expecting one of the highest increases of taxes in history. Between the elimination of the cuts of George W. Bush and the increase in social security contributions one speaks of ten more percentage points. A big blow that reduces my enthusiasm for the Democratic candidate for the White House. After having reflected at length however I decided that he is right; even if it is unpleasant, an increase in taxes on the more affluent classes is necessary. And I’ll tell you why.

Many economists, especially if they earn a lot, believe that an increase in tax rates is counterproductive. On the one hand, it pushes all taxpayers to more greatly evade taxes. On the other hand, it pushes the rich to work less or even to emigrate. The result is that the country produces less and the Treasury collects less. All in all, a huge own goal. Surely there is truth in this theory, especially when taxes are at Swedish levels. But given that in the United States the maximum tax is between 35 and 42 percent, according to the state, the size of this boomerang effect is debatable.

In spite of these problems, a redistribution of the fiscal amount is justified by the enormous increase in inequality. Although in the last 25 years the American GDP has more than doubled in real terms, the majority of Americans have seen their own real income increase by only 17 percent. Where has all this money gone? The answer is: to the richest.

In the last quarter of a century, the income of the 1% richest of the population has almost tripled, while that of the .01 % richest has more than quintupled. In the last economic expansion (between 2002 and 2006) one percent of the richest people secured 75 percent of the economic growth for themselves. It is not surprising therefore that there is such a big gap between the aggregate statistics and the perception of the majority of the population. As the Roman poet Trilussa said, few realize that on average everyone eats half a chicken when there are those who eat a whole one and those who are dying of hunger.

Why this gap? It is the joint result of technological innovation and globalization. If soccer lovers are willing to pay one Euro per year to see the best soccer player play, when the market is made up of 10 million Italian families, the maximum salary for a player was 10 million Euro. When the market becomes global and includes two billion families, the salary could arrive at 2 billion euro. And what holds true for soccer, is also true in other fields. A successful writer like J.K. Rowling today can sell millions of copies in the whole world in the space of a few days. It is not by chance that she became the richest woman in England after the queen.

These tendencies are very difficult to oppose. No one wants to force spectators to watch soccer players of the second level or prevent them from buying successful books. Left to itself however the market produces differences in income that become more and more unsustainable. If in one generation income increases only by 17 percent, the American dream of a continual progress is going to break down. The social contract on which the functioning of the market economic is based no longer reigns true. Questions of protectionism and mistrust for technological progress are born precisely from these fears.

To yield to popular pressure on these fronts, however, would be much more expensive than to redistribute the fiscal burden. If the price of paying to preserve the market is a higher tax burden, I will pay it willingly. The risk is that Obama, in addition to the tax burden, also introduces protectionism!