Why the Rich Should Be Taxed More: Progressive Taxation, Spending Patterns, and Unemployment
Economic justification for progressive taxes
In addition to the moral argument for progressive taxation, there are some important economic and fiscal arguments in favor of it.
The top 10% of earners own 90% of all stocks and bonds
The rich spend less and save more
Economists have observed that the rich spend a smaller total percentage of their income than the poor. This is why the vast majority of investments (which require saving) are owned by the very rich (see chart). The poor and middle class spend more, proportionally.
Therefore raising the income tax on high earners will not hurt total consumption as much as raising taxes on low earners. If we must choose someone to raise taxes on, this is one reason we should choose the rich.
US Unemployment and Taxes, 1948-2012
The rich do not create a lot of jobs
It is often argued by conservatives that the rich should not be taxed more because they are "job creators." The assumption made here is that wealthy people create jobs. They own large businesses, build factories, invest in new ventures and even hire maids and landscapers.
Certainly some jobs are created by the economic activities of the very rich. However, are they really "job creators"? Will the economy lose significant numbers of jobs if their spending power is reduced? The answer appears to be no.
Unemployment shows no relationship with the top marginal income tax rates in the United States over the last 60 years (see charts at right). In fact, today, with top rates at their lowest in many years, the unemployment rate is higher than it has been in a long time. If taxes on the rich really had such an impact on employment, we would not see these results.
Unemployment shows no positive relationship with the top tax rates across industrialized countries (see the chart I created below, using OECD data). The Netherlands, for example, had a top income tax rate of 49%, with 4% unemployment, whereas France had a lower tax rate (38%) and greater unemployment (9%). The data show no significant relationship between unemployment and taxes on the rich.
International Tax rates vs. Unemployment, 2010
Taxes and job creation
It is common knowledge that the vast majority of jobs are actually created by small businesses, not big businesses. Interestingly, the very same politicians who claim that raising taxes on the rich "hurts the job creators" then turn around and declare that "small business is the backbone of the economy."
Small businesses, the primary job creators, are led mostly by middle class and upper middle class people, not the very wealthy. Most small businesses make $1 million or less in annual revenue, a far cry from the tens of billions that is the norm among the Fortune 500. If politicians are interested in subsidizing "job creators" they would do better to cut taxes on the millions of small business owners and entrepreneurs that each employ 5 to 10 people, rather than a few thousand wealthy families who collectively play a tiny role in job creation.
Furthermore, there are different kinds of rich people. Many high-earners are lawyers, doctors, or others who directly create few or no jobs. A regional manager with a very defined role in the corporate hierarchy is in a position to create many fewer jobs (if any) than a wealthy entrepreneur starting a new company. Among the top 1% of earners in the US in 2005, about 31% were executives, managers and supervisors; 14% were financial professionals; 16% were medical professionals; and 8% lawyers. Most individuals in these professions have limited "job creator" potential at best.
Finally, some rich people become rich by, at least in part, destroying jobs. Presidential candidate Mitt Romney is a prime example of this. In his capacity as a high-earning management consultant, he often cut costs and increased profitability for his client companies by shrinking their labor force.
So, rather than rich people being general "job creators" simply by virtue of being rich, some create jobs, some destroy jobs, and some have no effect.