Why Are Republicans Losing the Tax Debate?–Part 2

Further to yesterday’s post on Why Republicans Are Losing the Tax Debate (“It’s the fairness, stupid”), let’s take account of the best argument of the Left on the matter.  In response to the data showing that tax rate reductions have shifted the income tax burden to the wealthy, the Left responds that the share of total income accruing to the richest 1 or 10 percent of Americans has soared, by so much that even with the total tax burden shifted, the rich are still woefully undertaxed.  Their chief analysis is shown in this chart, which juxtaposes top marginal income tax rates with the share of national income going to the top 1 percent:

One can, and should, have a good argument here about what this chart actually proves.  The Left points to an inverse correlation between low marginal income tax rates and high share of income going to the top 1 percent. But it could be used to demonstrate the supply-side argument that high rates (which few people actually paid anyway) cause high income people to avoid realizing income, by investing in unproductive tax shelters that artificially lower reported income, or other subterfuges.  It was possible, for example, right up to the late Clinton years, for a high net worth person to realize huge gains with no income or capital gains tax liability at all, through the simple expedient of going “short against the box” on large stock positions.  (A billionaire once explained this to me; it was lost on most journalists and people in Washington, and Clinton only moved to close the loophole when Robert Rubin told him about it and betrayed his Goldman Sachs pals.)  Recognize that when you use tax shelters or other gimmicks, you skew the data that goes into this chart, because those gains don’t count as “income” in the official statistics on which this chart is based.  In other words, it is likely that this chart is completely wrong.  Supply siders have always argued that lower marginal rates cause the wealthy to realize and report more income, and this chart offers evidence they are right.

Or you can ask yourself this question: Does anyone think the Kennedy family ever paid the 91 percent marginal income tax rate of the 1950s so beloved of Paul Krugman?  Please.  Or perhaps the Kennedy library would like to prove me wrong by releasing some old tax returns of Jack and Joe Kennedy from the 1950s.  I’m not going to hold my breath.  There’s a reason, as Peter Schweizer explained in Do As I Say, that the Kennedy family has its assets domiciled predominantly offshore, though this only seems to be a political handicap if your name is Romney.

The ur-text of the Left

But this argument is beside the point as well as futile, because the Left’s argument is that the high share of income earned by the 1 percent is unfair on its face, because it is more than they need.  (I stress “earned” here because “distributed” is an insidious semantic base-stealing we need to stop the Left from using.  But that’s a separate post.)  The theoretical argument behind the Left’s crusade for taking the wealth of the rich and giving it to their clients is based on the ur-text of the contemporary Left, John Rawls’ Theory of Justice.  Press a liberal intellectual, and eventually they will repair to Rawls’s “difference principle,” which holds that inequality of wealth of income is only just if it benefits the less well-off.  It may be an intelligible principle of justice in the abstract, but it is unintelligible in practice; one of the defects of Rawls is that in 600 pages he never moves from the abstract to an applicable rule of policy guidance, or even a vague framework for setting tax rates.  There is no “Krugman-Rawls Curve” analogous to the Laffer Curve, for example.

John Rawls

And one of the oldest principles of justice, stretching back to Plato and Aristotle, and which Rawls accepts, is that justice must move beyond the abstract to particular situations and individuals.  So let’s see how Rawls’s principle might apply to some real live individuals.  Does Bill Gates’s immense wealth violate the “difference principle”?  It is not obvious what the answer is.  It seems to me even Gates’s extraordinary case can be reconciled with Rawls’s difference principle.  Didn’t the means by which Gates rapidly gained his vast fortune involve improving the lives and productivity of millions of people around the world?  Was his financial reward incommensurate with the benefits that accrued to the less well-off of the world?

Let’s refine this further.  Take Gates or Warren Buffett, the two wealthiest Americans who happen to be liberal Democrats.  I’d like a liberal to explain in precise terms whether they acquired their fortunes unjustly?  And if they didn’t acquire their wealth unjustly, then a second query must be answered: at what point did the size of their fortunes go from just to unjust?  Was it $1 billion?  $10 billion?

I expect liberals cannot or will not give specific answers to these interrogatories, but will change the subject.

P.S. By the way, if you want to see Buffett change his tune on taxes, just borrow an old FDR idea and propose an undistributed profits tax on corporations that hoard their cash rather than reinvesting it or returning it to shareholders.  I guarantee you Buffett will take his first private jet trip of the day to the White House to kill that idea.