Why the Wealthy Subsidize the Tax Burden of the Middle and Lower Class

I have a theory: the U.S. economy requires a significant number of Americans to be stupid with money.  If we ever all got our crap together and started managing our personal budgets responsibly, the economy might fall apart.

Consider this article from Bloomberg this morning: Americans Can’t Help Themselves From Borrowing More on Credit Cards:

Americans borrow more in good times and less during recessions. The driving factor isn’t our mood about the economy. Borrowing seems driven by our credit limits. When banks offer us a higher limit, we use it. When they cut us off, we tighten our belts.

In college, I was a bill collector for Citibank.  Some of the things I’ve seen people do with credit cards just defies belief.

This is why I’m always skeptical about attempts to push tax burdens onto the middle and lower class. Yes, the wealthy pay a lot of taxes (I’ve written about this before, myself), but who else is going to pay them?

You might say, “the 47% need to pay their share!”  Okay, well let’s push $1 trillion worth of tax cuts off the wealthy (who unquestionably pay more than their share) and onto the 47% percent who are freeloaders.  Justice is served!

But…where is this money going to come from?  These people don’t have disposable income lying around that they can just send to the government.  If “Joe 47%” is making $25,000 a year and suddenly has to pay another $1,000 or $2,000 a year in taxes, where is this money going to magically come from?  Based on his current budget, he can’t pay it.

But, you say, he just needs to be more responsible with his money!  He has a flat screen TV and a motorcycle.  He should sell those, and stop buying stupid things!

Yes, absolutely.  Let’s have him stop doing those things and pay taxes with the money instead.  That will clearly be better for everyone….except Best Buy.  Or the entire retail sector. Or the entire economy.  Sad fact: if Joe stops doing stupid things with his money, the economy falls apart.  Joe serves an economic purpose by mis-managing his finances.  Every dollar he spends on something stupid is another dollar which makes the economy go ’round.

Which brings me back to my point: the U.S. economy requires a significant number of Americans to be stupid with money.

This all relates to a larger, more subtle point: the wealthy might just have to pay more in taxes to free up the middle and lower class to keep the economy moving.  Every extra $1 that “Milton 1%” pays in taxes is $1 that Joe can go spend at Best Buy.  And Joe spending that money at Best Buy is what keeps the economy turning.

To sound terribly crass and elitist about it: do the wealthy subsidize the tax burden of the lower class so that the lower class can make them rich?

Milton depends on a thriving economy to make money.  And Joe — multiplied by 250,000,000 — is the irresponsible engine that keeps that economy moving.  Perhaps it’s better for Milton to just pay some of Joe’s taxes so he can keep being stupid with money and Milton can get richer?

If Milton got a $1 trillion tax cut, here’s my feeling on how this would play out —

Milton would love it for the first 2-3 years.  He’s paying less money in taxes.  But Joe suddenly has to pay the government a bunch of money he doesn’t have.  Let’s assume he gets his crap together rather than go broke.  Joe stops buying flat screen TVs, and motorcycles, and he cancels cable, and his data plan, and stops eating out, just so he can save enough money to pay his newly enlarged tax bill.

By Year 5, Milton is starting to sweat.  The economy has tanked.  His business is starting to decline.  Whatever it is that Milton does to be rich is not working that well anymore.  Economic problems have “trickled up” to made Milton’s life harder.

By Year 10, Milton realizes the truth: it was better to just pay a bunch of Joe’s taxes. Distasteful as Milton found that, it was a necessary evil. Ten years on, he has lost so much more money than he ever spent subsidizing Joe’s taxes in the first place.

In summary, the thought process is this…

  1. If we cut taxes for the wealthy, then…
  2. who is going to pay more in taxes, and…
  3. where is that money going to come from, and…
  4. at the expense of what other economic sectors, and…
  5. what happens to the overall economy when those sectors decline?

Yes, the wealthy pay more than their fair share of taxes.  But any “cure” might be worse than the disease.