Would the millionaire tax really boost economic growth?

I’ve read some posts and comments recently about the hypothetical “millionaire tax” that may have large implications for the Democrats in the midterms.

David Leonhardt argues for the broad middle class benefit of such a plan while Jon Chait argues that it would be regressive. James Fallows argues for the broad middle class benefit as well, while Jonathan Chait argues that “millions of young people will not die at the hands of progressive taxation” (using some harsh expletives) unless Democrats adopt this policy.

Most posts though seem to support the possibility of a universal minimum tax under the circumstances, but at least one post argues the opposite, and touches upon possible regressive effects, though these appear to be largely unrelated. So far it seems likely to be a dead issue for now.

I’m of two minds about this one.

I’m generally a big supporter of progressive taxation: taxes on the rich, on corporations and on wages should all be extremely high if we want to finance public policies that strengthen society. The affluent have done very well over the course of our history; a lot of people have a big stake in having their fortunes multiplied in the long run. (I’m in the camp of a progressive income tax; let’s not shoot the messenger.)

However, I think it’s possible that we don’t actually need to have a minimum tax at all, that the tax would be regressive, that it wouldn’t be necessary if we could instead raise corporate taxes. And if any policy that has a regressive effect hurts the people who support it the most, I find this argument compelling.

I don’t think this is the case here, at least with respect to the political prospect of passing a thousand millionaires tax to either get out of their current deficits or to finance universal pre-school education. Given the amount of domestic spending that we have to figure out, raising taxes on the middle class seems high on the list.

Take the redistribution under Obamacare: I’ve argued that it shouldn’t hurt our deficit, even though it does incur additional taxes on the “middle” so we can subsidize the wealthy. And actually, I think the millionaires tax is on a lower-temperature list because it would be contributing directly to deficit reduction, whereas the health care law took revenues away from the government to redistribute to rich people. I think the millionaires tax is likely to have a much more regressive effect because the people who work in the real economy tend to be at the bottom of the payrolls, and the remuneration being received by the very rich is less likely to be in the form of fixed wages, and more likely to be in the form of stock options.

As a result, while many arguments exist in favor of progressive taxation, one of the main one is one of the least legitimate – that it’s necessary for the middle class. I think there are better ones; I’m not sure of what most of them are, except my general suspicion that it’s possible, though less likely, that a universal system of taxation might be better for the economy and for the middle class than the current system.

Plus, it’s not entirely clear that, if the millionaires tax is redistributive in a way that hurts the affluent, that will hurt the middle class in ways that have benefits (increased household spending) or drawbacks (increased economic inequality). I’m worried that Democrats in Congress will think they need to have such a policy to get elected, but if a single millionaire’s income being taxed at the very high rates a future President might like isn’t making your constituents much happier, I doubt whether there’s any need to try to pass it.

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