Benjamin M. Friedman is professor of political economy and former chairman of the Department of Economics at Harvard University. His books include Religion and the Rise of Capitalism and The Moral Consequences of Economic Growth.
Harvey S. Rosen was chair of the Council of Economic Advisers under President George H. W. Bush. He is professor emeritus of economics and business policy at Princeton University.
Is there a moral argument for raising taxes on the rich?
Yes. Not as an abstract principle, true any time, but I approve of the tax and spending program proposed by President Biden, and I’m prepared to defend it on moral grounds. The president has been very specific about what programs the revenues are to be used for. They’re expensive but worthwhile, and likely to benefit the economy and foster a more equal society—not only the physical infrastructure proposals, but others such as universal preschool education and the availability of daycare to allow women of all incomes to participate in the labor force. We could simply borrow, that is, finance the additional spending, thus adding to government indebtedness—but that’s not a good idea. And in light of income trends over the past half-century, it’s highly appropriate to turn to the top 1 percent or so of taxpayers to finance these programs.
When Alexis de Tocqueville visited America in 1831, the first thing he noticed was what he called “equality of condition” among American citizens. He didn’t mean everybody was equal in every way, including wealth, but he saw a kind of equality of status as a citizen. He came from France, a country with a hereditary nobility, and this equality struck him as so new that he highlighted it in the first sentence of his book.
In light of income trends, it’s highly appropriate to turn to the top 1 percent of taxpayers to finance Biden’s programs.
I think the widening economic inequality in the United States over the past
half-century or so is reaching proportions where it threatens this basic equality of condition. Tocqueville put his finger on something deeply moral that he admired about the U.S., and it’s now at risk. How far can inequality go before we’ve destroyed that quality in American life? Nobody knows. But if we keep following the current trend, with more and more income and wealth accruing to a narrow slice of families at the very top, we are at serious risk of losing it. I think that would be wrong in moral terms.
There’s also a moral argument in a different sense about the role of money in politics. That’s now gone well beyond anything the Founding Fathers—or, quite recently,
we—could have imagined. We’re the country that pioneered one citizen, one vote. There are other factors, such as the Supreme Court’s Citizens United decision. But we now have individuals in both parties who could pick up the entire cost of a presidential campaign and never even miss the money. That’s beyond anything that anybody ever had in mind in construing the political nature of the American republic.
Can tax rates be so high that they are inherently morally wrong?
As with inequality, there must be some limit, although here too nobody knows what it is. Taxation at the level President Biden is proposing does not strike me as confiscatory, or as even approaching that limit. We currently tax top-level incomes at a much lower rate than we did a few decades ago. Also, it’s more complicated than just the rate. People in the top bracket often earn much of their income in forms that are taxed at lower rates, such as capital gains or carried interest.
It’s the Warren Buffett problem—why does Buffett pay, according to him, a lower percentage of his income in taxes than his secretary pays? There’s serious economic research showing that this reduction in the tax rate at the very top is a big contributor to the widening wealth inequality we’ve seen.
Will it help to increase compliance through more aggressive tax collection?
As a moral matter, you want everybody to comply. As a practical matter, compliance requires enforcement, which is expensive. Will enhanced enforcement consume more resources than it will generate? The Biden administration claims that spending billions of dollars on increased compliance will generate a large multiple of the amount spent. This isn’t an area I work on, and so I don’t know if that estimate is plausible or not.
Is there a Jewish view on taxes?
The most obvious is the Temple tithe. Throughout biblical times, back to the Tabernacle in the desert, everybody participated in financing the Temple. I don’t think there’s a view in Judaism rejecting economic inequality per se; the issue is how to deal with the consequences of inequality. It’s simply understood, for example, that some people will be landowners and some will be poor workers, but there are many laws in Vayikra and Devarim, and in the Talmud too, about economic relations. You don’t trim the edges of the field—you leave that for the poor. The same for grapes that fall to the ground. And you can’t let the sun set without paying your workers their daily wage.
Is there a moral argument for raising taxes on the rich?
No. I don’t see any reason to tax the rich per se, and it’s not clear to me that it’s a moral thing to do. I see no particular virtue in ganging up on a group of people just because they have money.
Anyway, the question distracts us from the basic issue: “What’s the goal of taxation, and what kind of taxes will help achieve it?” The goal should be to enhance growth, but also to distribute the burden of taxes fairly. A tax system will boost growth if it distorts people’s decisions about work, investment, savings and risk-taking as little as possible. Fairness is in the eye of the beholder. While critically important, it’s a value judgment. The focus should be on the best trade-off between growth and fairness, not on hammering the rich.
Regardless of your politics, you should care about growth. Think of the Bernie Sanders agenda: free daycare, free college, paid leave, etc. You need money for those programs, and you get it from a high-growth economy, one in which people make economic decisions on the basis of fundamentals, not to dodge taxes. To avoid taxes, a corporation can always invest less, hire fewer people or just locate somewhere else. And even if you have your heart set on screwing corporations, you should do it efficiently by broadening the tax base—for instance, by telling corporations they can’t deduct interest anymore—rather than by raising the tax rate. That would arguably make the system fairer, and you’d get more money.
Can taxes be so high that they are inherently morally wrong?
I wouldn’t put it that way. But at some point, if rates get too high, revenue goes down. That’s the infamous Laffer curve. If you’re raising taxes on some person or activity so much that it actually reduces tax receipts, it means you hate that person or activity so much you’re willing to sacrifice all the progressive goodies you could fund with more money—more education, more abortion clinics, whatever—just to hurt them.
I see no particular virtue in ganging up on a group of people just because they have money.
During the Obama campaign, a reporter asked the candidate what he would say to people who argue that raising the capital gains tax will actually reduce revenue. I was sure Obama would challenge the premise, but instead he said, essentially, “I think we have to spread the wealth around.” In other words, he embraced the notion of punishing the wealthy even if it would mean less revenue for the Treasury. Is that a moral way to conduct taxation? Even rich people are still members of the community. Is it good to tax their income at such a high rate that you have less money to spend on beneficial programs? It doesn’t sound moral to me.
Will it help to increase compliance through more aggressive tax collection?
I’ll raise my hand and call bullshit on that. When I was working in the Treasury Department, I learned about the “tax gap”: the difference between the amount of money you collect in taxes and the amount you would collect if compliance were perfect. Every administration, Democratic or Republican, says, in effect, “Give us $50 billion more for the IRS, and the money will come rolling in!” I was in charge of the Treasury’s Office of Tax Analysis, and my staff researched this and found that a good chunk of that money is simply not collectable. It’s owed by people who have gone bankrupt, or disappeared, or who just don’t have the cash. You just can’t get it. I had to tell the Secretary that increasing IRS funding wouldn’t bring in buckets of money. It was very deflating. Years have passed since then, and I haven’t studied the tax gap recently, but I’d be surprised if it’s much different.
Is there a Jewish view on taxes?
On page one of my introductory textbook on Public Finance, I have a long quotation from First Samuel. It’s the story about how the Israelite tribes wanted to have a king. They said to Samuel the prophet, “Give us a king! Everyone else has a king!” And Samuel said, no, that’s an awful idea, because if you have a king, he’ll want an army and palaces, and he’ll come to you for money, and it will be a burden on you. (Samuel eventually relented, and sadly, the consequences were exactly what he predicted!) This scenario perfectly encapsulates the subject matter of Public Finance. Governments spend money, but it has to come from burdensome taxes. Centuries have passed, mixed feelings about government remain, and much of the controversy still centers around its taxing behavior.
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Artscroll publishes some wonderful biographies of the premier Rabbis of Eastern Europe, when Jews often lived in shetls or ghettos of cities but were autonomous. These bios often contain tales of the town’s Rabbi shaking down or in the case of butchers extorting larger donations from their wealthy citizens than the butcher or merchant offered to the Rabbi’s communal fund. Invariably, the Artscroll biographer takes a view that this is laudable conduct on the part of the Rabbi who will use those funds, voluntary or coerced, for public benefit. So at least in modern Judaism, exacting enhanced contributions from those able to provide it, even if not entirely voluntary, seems well accepted.