The Economist has produced the clearest explanation of the necessity of raising taxes on the rich that I have seen. It starts with the increasing deficits run by the governments of the big economies, those in the OECD. Both households and businesses have increased their savings rates dramatically over the past two years. In the US, the household savings rate has risen to more than 6% of household income from about 2.7% in the years before the Great Crash. The OECD predicts that in the aggregate, the expenditures of households and businesses across the economies of the OECD this year will be $2.6 trillion less than incomes.
In developed countries, people don’t put that money in a mattress. They accumulate financial claims against other people, in the form of bonds, stocks, bank accounts and so on. With all this saving going on, who is going to borrow that money? On a net basis, businesses and households won’t borrow. Foreign countries could be on the other side. China, and maybe other Asian economies could borrow from the US by running a trade deficit, but that isn’t going to happen.
Who else is there? The Economist tells us:
The only other possibility is governments. That is why the rich world’s private surpluses have been mirrored by equally vast public deficits. Last year the OECD’s governments ran a combined deficit of 7.9% of GDP, and this year it is likely to be only marginally less. Among the big economies, Britain’s deficit will be the largest, at 11.5%, with America not far behind. In an accounting sense, these eye-popping deficits are simply the counterpart of private surpluses. In an economic sense, their remarkable increase is less the outcome of government profligacy than private thrift.
This is pure Keynesian economics, as I explained in detail here. When savings increase and are not used for productive enterprises, they go to other countries, or wealthy people gamble them away on financial markets, enriching the partners at Goldman Sachs and the traders at JPMorgan Chase, but no one else.
Having explained the problem, the Economist then examines each solution offered by conventional thinkers, quantitative easing, more stimulus, and even the possibility of increasing taxes. Each fails. Misery is the new normal: high unemployment and a steadily worsening quality of life.
Rich people refuse to pay taxes. They hire compliant economists who support their greed, exactly the same way tobacco companies hired compliant scientists to deny the dangers of their product,. The hired goons pollute political discourse with lies and nonsense. The rich buy off politicians, and their media produce a small compliant majority of populace to vote for those craven politicians. Even today, in the face of monumental deficits and massive national debt, we are told that taxing the rich will wreck the economy, and the University of Chicago economists who infest our policy apparatus nod their bobbleheads approvingly.
The plain fact is that if taxes had not been cut by a combination of soulless Republicans and spineless Democrats led by foolish presidents, we would not have seen the real estate bubble and the Great Crash. If there had been a balance between government investments in public goods and private investments in productive businesses on one hand, and savings and taxes on the other, there would not have been enough cash washing around to get the bubble going.
The result of our absurd public policy is that we have gobs of money available for unwanted private investment, and a no money for investment in desperately needed public goods. US infrastructure is suffering from decades of neglect, from roads and bridges and subways to water mains and electrical transmission systems to water treatment facilities. Practically every child in America either gets a crappy education or graduates with corrosive debt. The list of necessities is long and painful.
There is a solution. We increase taxes on a very small segment of the population, say the top .5% of incomes and wealth, at a high enough level to provide meaningful revenues, and invest the money solely in US public goods.
The benefits are obvious. We can fix our infrastructure and increase the quantity of public goods, reducing unemployment and improving the conditions for economic productivity. The less money the rich have, the less they can spend buying democracy and gambling.
I’m not seeing the downside. Oh, now I remember: it will make the heirs to the Walton fortune and the Koch brothers really sad.