Taxing the Same Few Households Won't Reduce California's Risk
We didn't hear back from the Wall Street Journal on a letter to the editor, so Liberty Lensers get an exclusive.
Carol Ryan warns that the U.S. economy is “increasingly dependent on a narrow group of very rich households” and that this concentration poses a risk in a downturn (”Billionaires’ Low Taxes Are Becoming a Problem for the Economy,” Feb. 18). She is correct to identify this dependence as a risk. But she never reckons with the logical implication of her own thesis.
If fiscal reliance on a narrow tax base is the problem, the solution is not to deepen that reliance through additional taxes on the same few hundred households. Capital income rises sharply in asset booms and falls sharply in downturns. Increasing taxes on that same narrow group would deepen fiscal reliance on the most cyclical and fragile components of the tax base, increasing rather than reducing revenue instability.
Ryan also presents only one side of a contested empirical debate. She cites a single NBER working paper finding that the 400 wealthiest Americans face a 24% effective tax rate, compared with 45% for top labor income earners. A recent comment by David Splinter of the Joint Committee on Taxation, finds the top 400 effective rate rises to 38% against an overall rate of 25% after correcting for several methodological issues with that NBER paper, including dynastic family wealth spread across multiple returns and double-counted capital gains. When charitable contributions are included, Splinter estimates top 400 effective tax-and-giving rates could exceed 70%.
The U.S. tax system is already quite progressive, even at the very top of the wealth distribution. If the concern is tax base stability, the conversation should be about the structure of government revenue and the uses of that revenue, not about whether billionaires pay enough.
Joshua Rauh and Benjamin Jaros
Stanford, CA
Mr. Rauh is the George P. Shultz Senior Fellow in economics at the Hoover Institution and a finance professor at the Stanford Graduate School of Business. Mr. Jaros is a research fellow at the Hoover Institution.