Friday, November 25, 2005

Economic Absurdities: Do Tax Cuts Hurt the Rich?

Do “Tax Cuts for the Wealthy Hurt the Wealthy?” Economist and Cornell University professor of economics Robert H. Frank suggests that they have. (See the New York Times, November 23, for his essay. Here is a link: )

In a two-pronged analysis, Prof. Frank suggests that not only have these cuts made the rich less happy, but they have also somehow hurt our infrastructure causing long-term misery for all of society. I think Prof. Frank’s approach is wrong on both counts.

Let me first focus on his initial premise, which I find most troubling. Prof. Frank suggests that tax cuts for the rich have made them buy bigger houses and more things, presumably in a quest for happiness. He does not think they have been successful: “As economists increasingly recognize, however, well-being depends less on how much people consume in absolute terms than on the social context in which consumption occurs. Compelling evidence suggests that for the wealthy in particular, when everyone's house grows larger, the primary effect is merely to redefine what qualifies as an acceptable dwelling.”

I agree with him that more material things may not produce happiness. Happiness is an elusive state for many reasons. If Prof. Frank were a philosopher or theologian, I might be interested in his theory. I may well agree with him. But this is not the stuff of which tax policy should be made. We look to material measures for wellbeing based on the simple paradigm that, all other things being equal, we would rather create more wealth than less wealth. I think most people agree. If your personal belief means having less wealth makes you happier, great. Give to the charity of your choice and simplify your life. But having government do this through taxation is another matter.

Comrade Frank – oops, I mean Prof. Frank – would apparently arrogate to the prerogative of government the decision to extract higher taxes from the so-called “rich” so that we can made them happier and, probably in his view, more virtuous. (I’m guessing he utilizes the Democratic party’s functional definition of rich, meaning people who have homes and jobs – but this is admittedly speculative on my part). However, if his goal is happiness for this group, and he really thinks that the “rich” operate on the premise of envy as the means to evaluate happiness, then more inequality, not less, would be the answer.

I have to disagree with this assessment of how people make decisions about earning more and improving their conditions. I have five kids, and we could use some more space in my house. I don’t think I’m more virtuous about wealth than anyone else. If I earn enough to add on to my house, it is because we think as a family it would improve our quality of life. Whether my neighbor has a bigger house than me doesn’t matter. If it does, then I may have a moral problem, but I don’t think the government is really capable of solving that.

After all, it could choose to solve it as they do in Cuba, by sharing the misery. I just read this morning that the minimum wage in Cuba was generously raised by Dictator Castro from 5 to 11 dollars per month. That’s not a typo – per month. I understand from friends who have visited there that surgeons drive taxis to make ends meet. I don’t find that very attractive.

People of the left think that a zero-sum game is the norm, when I believe that it is possible for all of our boats to rise. I don't benefit by bringing down my neighbor's boat.

As for the second premise, I don’t want to belabor the points made by my colleague Dr. Goss in previous posts. Our problem is not that we undertax, it is that we overspend. Government spending growth has skyrocketed. (If you read the article, you will note he points out that a pothole that breaks a wheel on a Porsche costs more than on a Ford. I see the point, but apparently he hasn't read about the recent highway bill that spends billions on roads and pork.)

I’m sure Prof. Frank has some interesting ideas in his textbook on economics, which the article points out he has authored. However, to the extent I have any influence over my kids entering college, I will suggest they study economics from someone else. (Professor Goss – you may have your hands full.)

Have a great Thanksgiving Holiday weekend.

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