Tax policy is, without a doubt, one of the biggest issues dividing Democrats and Republicans. The left argues that the mega-rich are under-taxed, while the right loves to claim that taking money out of the pockets of these "job creators" means everyone else's jobs disappear, too. Now, the Republican argument about taxes at this point is convoluted and hard to disentangle. Rhetorically, it's a mess, but there are elements of logic to it that are useful to untangle. The first issue is that they conflate short-run arguments with long-run arguments, so that's probably the place to begin.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
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