By Amar Ali, JMI Research Associate and Florida State University Graduate Student in Economics
“Don’t Cut the Budget! Tax the Rich!” From the protesters in Wisconsin to the chattering class in NYC, this has been the emotionally charged rallying cry of those left of center. Essentially, what they are proposing is that the marginal tax rates for the highest brackets be raised, resulting in increased revenue to offset the deficit that the State and National governments are currently facing. One person advocating such “emotional economics” at a Wisconsin protest is the famous film-maker Michael Moore. To quote from his speech: “Today just 400 Americans have more wealth than half of all Americans combined.”If that weren’t enough, the esteemed economist Jeffery Sachs went on CNN’s “In the Arena” with Elliot Spitzer and emotionally proclaimed, “We can’t afford to not have it [earthquake detection and science funding], we can just tax the rich.”So where do I begin to address these statements? I will try and start with the “economist” Jeffery Sachs. By taxing the rich, presumably, Dr. Sachs is advocating for increasing the top marginal tax rate. By increasing the marginal amount the wealthiest have to pay, is it assumed that net revenues will rise. Yet this pesky little thing called history keeps butting in.Since 1950 when the top marginal tax rate was 90%, through the 1960’s when it was lowered to 70%, to the 1980’s when it was further lowered to 28%, to the present rate of 39%, the government’s share of GDP has averaged 20%. Basically, no matter how much we “taxed the rich,” the size of government has remained the same.So history demonstrates the sheer ineffectiveness of raising the top marginal tax rate in order to increase revenue. Of course, as an economist, Jeffery Sachs should know better. Regression analysis (forecasting equations) rarely can and does predict human behavior.Moving on to Michael Moore, I decided to take a different tack to address his message. Taking a more “nuanced” approach, Moore says that instead of raising taxes on anyone making more than $250,000, we should look to the wealthiest 400 people in the US. As a former “bleeding-heart liberal”, I decided to channel my former views, and one-up Michael Moore.Instead of just taxing the wealthiest 400, why not confiscate their entire net worth? With the help of Forbes Magazine, I calculated the aggregate (total) net worth of the 400 wealthiest Americans. It turned out to be approximately $1.27 trillion. That’s a large number by any standards. Another large number is $1.1 trillion. That is the current budget deficit, or gap between revenue and spending to run the national government for the 2012 fiscal year. That still doesn’t take into account the 14 trillion in debt that is outstanding. Nor does it affect the $38 trillion deficit in Medicare, or budget deficits that the states are facing this year, or future budget deficits of the national government starting in 2012.I wonder how 1.27 trillion will pay for all that Mr. Moore? The numbers just don’t add up. I “feel” the pain, but I’m not too sure about our creditors accept this “emotional economics”.