A Question: The rich and the middle class

Great Debates
1

I saw a headline about the possible cutting of teachers salaries around here by 10%. We know that many state workers salaries have been cut all over. This leads to the following question:
If making the rich pay a bit more, so they have less money, will destroy the economy, why doesn’t cutting the salaries of a lot more middle class people do the same thing? Sure the rich deserve their money, in some sense, but do so people who are working for it. (I do a lot more work for the money I get from my salary than I do for the increase in my investments.)
If we were talking cut in welfare payments, it would be cruel and heartless, but there could be the sponging factor. The people who are being hurt now are not sponging off the system.

And of course a 10% decrease in a teacher’s salary is going to hurt a lot more than a 3 or 4% tax increase in the top bracket for a millionaire. So, why don’t the middle class get the same consideration as the rich? And a cut from a negotiated salary is just as much a tax as raising the top bracket.

2

Have you looked at the numbers to see how much you’d have to tax the rich to get all the money you need?

The states are facing not just big budget shortfalls, but huge gaps in their public pensions, and they’re getting hit with higher health care costs and other problems.

Also, the states have a problem the federal government doesn’t have - their populations are much more fluid. Tax people too much, and they leave. The states are quite constrained in what they can get away with in terms of tax hikes. As it is, the highest-taxed states are already losing population.

State governors understand the implications of this map. And they’ve seen the results of that in Detroit, and it’s not pretty. That’s why even progressives like Jerry Brown and Andrew Cuomo are starting to look at the public unions.

At the national level, taxing the rich to pay for benefits to the middle class or for high salaries and benefits for millions of workers starts to run you into the real problem that there are only so many people who are so rich that you can collect large sums from them with modest marginal rate gains. That’s the problem with taxing the rich - eventually you run out of them and have to start defining rich down so you can expand the revenue pool.

The correct way to pay for widespread diffuse benefits across the population is with a consumption tax. But tax increases just aren’t going to fly in this environment - not if the money is going to pay the salaries of people who have been more sheltered from the recession than the people being taxed, and who make more than the median income already.

3

The reason the states are in trouble is a great decrease in revenue. Everyone from California to Texas has budget gaps, so you can’t blame them on liberal legislatures. So there isn’t anywhere for people to go - assuming they understand that lower taxed states are going to have crappy services.

And public employees have hardly been sheltered from the recession. In California nearly all have to take furlough days, even university professors. Cities are laying off people in carload lots, even cops in Oakland.

Public workers are not protected. The only group protected are the well to do. Yeah, their portfolios have gone down, but they’ve recovered assuming decent financial planning. Mine is above pre-crash levels already, and only partially due to my putting money in. Which I can do because my job wasn’t affected. This has been a very bimodal recession - people like me are doing great, but people who had the bad luck to get fired or were just hanging on in the first place really got screwed.

Anyhow, it doesn’t have to be an even-or thing. Perhaps the workers could take some cuts - and certainly pay more for healthcare, which might drive support for a decent solution, while the rich also pay more to help restore services and/or reduce the deficit. The revenue which would have been recovered federally from eliminating the Bush cuts for the top earners was pretty substantial. The states are so desperate now that even moderate tax increases on the well to do would help.

And state workers still don’t get high salaries - the salary level in Wisconsin is well below industry equivalents. They do get better benefits. But as of now the sacrifice is all one sided, and you never responded to the point about which is better for the economy. I’d say it is pretty clear that progressive tax increases instead of regressive ones are.
After all, what is better for the public - the rich keeping every penny they get to keep now, or more criminals running free. If we could only convince the criminals to go after those in favor of laying off cops we’d have the answer, alas they’ll hurt poor people, and the rich won’t give a crap.

4

It’s an excellent question: in America, why is the money being held by rich people more important than the money held by people who aren’t rich? Why is it that to take it away from the rich is to threaten the very foundation of our society, but to take it away from the middle class is good for America?

5

Here in TX, at least, it has to do with limits on deficit spending by the state. Constitutionally, we have to have a balanced budget: when the tax revenues aren’t there (and they aren’t there in a really big way right now), taxes have to go up or spending has to go down. No one is willing to raise taxes because the last election made them think that that will be death in the primaries. Education is the largest single issue in the budget, so any meaningful cuts will hit education.

On the federal level, deficit spending is the norm. The whole way of thinking about these issues is different. The theory, at least, is that by keeping taxes low on the top percents of earners, the economy as a whole will grow/recover in a more robust fashion, helping everyone.

If the federal government had to balance their budget the way many states do, the conversations last December would have been very, very different. I’m not saying that any of this makes a whole lot of sense, but the “they” that wanted to extend the Bush tax cuts is not the same “they” that are slashing state budgets everywhere right now.

6

Answer:
The Rich Are Better Stewards of Money Than the Poor

7

During a recession, demand plummets. As such, corporate income decreases. As such, they either need to lay people off or decrease their wages in order to stay in business. For various reasons, businesses generally choose to lay people off and maintain wages at pre-crash rates. This means that the business survives, but unemployment rises across the nation.

The government, on the other hand, is far more concerned with macro-economic theory than a business is. As such, they prefer to cut wages rather than people. And as part of their interest in macro-economic health, they also have to solve the problem of unemployment in the rest of the country. Demand has dropped, but as the companies laid off more people, that just meant that demand dropped even further. And since expected wages have stayed the same instead of dropping with income, the companies have no money to hire people.

Keynes’ solution is, effectively, that the government step in and provide demand to the companies. That is to say, the government goes out and gives free money directly to business, to consumers, or simply doesn’t take money away from consumers. The idea is to make businesses appear healthy for long enough that everyone forgets all about the market crash, go back to business as usual, and start hiring again.

Giving out free money or not taking in necessary revenues (via taxation) both mean that the government racks up a debt. Of course, this means that as soon as the recession starts to recede, the government has to jack up taxes, cause a second panic, and effectively destroy everything they had just accomplished (Keynes sort of glossed over that part).

Of course, if they can reduce their own spending, then they can divert more tax money towards debt, which is effectively the same as raising taxes. But it does, as you’ve noted, mean that government employees are bearing the brunt of paying off the national debt, instead of the entire populace. I would imagine that the idea is that no one is particularly worried about poorer teachers. A poorer teacher keeps driving the same old car for a few more years than he had intended. A poorer rich man doesn’t employ new workers. So if your goal is to prevent market panic, you might well choose to tax the teachers. The market cares more about employment rates than how snazzy their teachers look.

If you’re going to target your “tax” on a certain segment of the economy, a fiscally dull one that is not going to go broke isn’t a particularly bad option.

And no, none of this makes any sort of mathematical sense. Macroeconomics is all about human psychology. The market shouldn’t have crashed to begin with (in terms of real numbers, the housing crisis simply wasn’t a significant dollar amount), and giving everyone free money shouldn’t have anything to do with making the market stable again. Ultimately, everything gets fixed when everyone forgets that there was a problem to begin with. Positive announcements like “Government spending reduced!” help with that better than negative ones like “Taxes to rise!”

8

Yes, but, crucially, the politicians and the people who fund their campaigns aren’t poor or middle-class.

This used to be known among economists as demand-management. One provides extra money to the lower part of society in the form of government benefits, easy credit and low taxes to stimulate economic growth, especially as the lower parts of society will be hardest hit by an economic slump and will therefore be more likely to spend the money received, stimulating economic activity. This requires deficit spending. When the economy grows again so do state revenues, reducing the deficit. Should the economy grow too fast and lead to inflation the opposite techniques can be used, higher taxes, lower benefits and higher interest rates.

Monetarism, the paranoid, deficit-hating, deflationary system credited by idiots with saving the economy from evil commies like Harold Wilson and, in foreign parts, Jimmy Carter, is actually the same theory seen from the other side. If one’s main concern is economic regression and unemployment then Keynesian methods will be used to solve those problems, even if taken to extremes which can lead to inflation, albeit inflation which rarely exceeds the contemporary rate of economic growth. If you see the main problem as being maintaining value in your currency holdings and the “excessive” power of your unionised workforce, you use the same techniques in reverse, to bring about deflation and high unemployment.

Hence the post-1980 economy of the Anglo-Saxon countries, high levels of wealth disparity, high structural unemployment, low inflation, strong currency, so on.

9

Because middle class teachers can’t fund political parties, think tanks and the media to push the concept that what is in their best immediate financial interest is also (by utter coincidence) in the best interest of the nation as a whole the way billionaires can and do. That would be the honest answer IMO.

Also ‘tax increases’ are bad because they remove money from circulation which could be used for consumption and investment, which damages the economy but ‘spending cuts’ are ok despite doing the same thing and removing money from circulation.

On these issues there are the real reasons people do them, and the reasons they pretend. The real motive is to empower the plutocracy, reduce taxes (esp supply side taxes on the well off) and reduce spending on social programs and infrastructure. The pretend motive is to grow the economy, create jobs and reduce the deficit. If you look at the pretend motives you get confused by the endless contradictions and bad ideas being thrown around. If you look at the real motive things make sense and are done fairly consistently.

10

The rich are better equipped to avoid taxes, maximize insider information, and leverage larger amounts of money in every possible way. Even if the poor pooled their money to try to do the same kinds of things, whatever system they used would be less efficient and more likely to be parasitized by insiders.

11

Teachers’ unions aren’t exactly wilting flowers, you know.

But the real answer lies in the market. If we cut teacher salaries by 10%, will that significantly reduce the quality of education? If not, then teachers are paid too much.

12

Well, there’s the cynical “golden rule” (“Whoever has the gold, makes the rules”).

But if you’re comparing cutting state workers’ salaries to increasing taxation on the wealthy, you’re comparing apples and oranges. In the first case, the state is decreasing the amount of its money it pays out to people. In the second case, the state is taking more away from people, of what they have earned/obtained for themselves via other channels. This is less philosophically justifiable, especially from a conservative point of view.

13

Your honesty needs to have a conversation with the facts.

http://www.opensecrets.org/orgs/list_stfed.php?order=A

14

The difference is that spending cuts do not have deadweight losses. The reason that tax increases are worse for the economy than spending cuts does not have to do with demand but with production. Every tax creates a deadweight loss. The higher the marginal tax the greater the loss. The more elastic the demand for the commodity being taxed the greater the loss. Rich people already face the highest marginal rates so raising the rates on them would cause greater deadweight losses than raising the same amount of money differently. Also since rich people’s production is generally more elastic than other segments of the population raising taxes on the rich causes more deadweight loss than raising the amount of money differently. (For the purposes of simplicity I am conflating the substitution effect with deadweight loss)
Because states have to have balanced budgets they can not running Keynesian stimulus producing deficits. Therefore all of the money given to the teachers in the form of salary will have to be taken out of the economy of the state in taxes. The net stimulus effect of this spending is only equal to the extra production that will be generated by the teachers not quitting and getting better paid jobs. Since teaching children is a skill set with limited opportunities outside of the school system, I would expect the stimulus effect to be almost neglible.
The idea that teachers can’t fund political parties is as true as beer companies can’t fund sporting events.

15

Because these “middle class” people that you are talking about are being paid with the public’s money. The “rich” aren’t. Why is it so hard to understand that private wealth does not belong to the government?

Bullshit. The American Federation of Teachers has contributed nearly 26 million dollars to the Democrats since 1990. The National Education Association has contributed over 27 million, and the American Fed. of State, County, & Municipal Employees has given them over 40 million.

Cite. http://www.aier.org/research/briefs/1550-obama-thanks-his-friends-government-spending-and-union-support

Every dime of that is, at the end of the day, taxpayer money.

16

The public employee’s unions are the biggest lobbyists in Washington. Couple that with their ability to organize large demonstrations and their ability to put out a good ‘ground game’ during elections, and they are arguably the most powerful special interests in the U.S.

This problem pre-dates the recession. California has been in financial dire straits for a long time. Michigan has lost a good chunk of its tax base - Detroit has entire neighborhoods that have been abandoned. And of course the retirement benefit shortfalls have nothing to do with the recession - and there’s over a trillion dollars in shortfalls between the various states.

Compared to the pain felt in the private sector, the public sector has been virtually untouched.

Have a look at these graphs. They compare job losses in the public sector vs the private sector, and wage losses in both. Ezra’s commentary around it is ridiculous, but the graphs are sourced and they tell the picture.

Here’s another good set of graphs: Two Americas. They show that the unemployment rate for public sector workers is only 3%. Their wages from 2006 to 2009 went up by 9.8%.

Sure, you can find a few cases of furloughs and slight cutbacks, but that’s against the backdrop of an entire sector that has skated through the recession virtually untouched compared to their private sector counterparts.

Portraying them as the weak and disadvantaged is simply ridiculous. In California, they virtually run the government, and they have inordinate amounts of power in every state. They are also much wealthier than the average worker in the private sector.

17

So we shouldn’t tax the rich, if that won’t solve our problems? Two flaws here.
(1) Taxing plumbers raises even less money than taxing the rich, so by your implied argument we shouldn’t tax plumbers! (Better yet, let’s not tax people named septimus :cool: )
(2) The rich do have quite a bit of wealth and income. The top 1.2 million households averaged $1.3 million income in 2007; getting even an extra 7% of that would net over $100 billion – hardly chump change.

Is income inequality good or bad? That debate seems lost to the rationalist side in today’s America. I’ll just quote from an article demonstrating that the inequality is worse than most think:

18

Even if that’s true, which I’m not completely sure of, the solution is to make the lives of the private sector workers better, not to make the lives of the public sector workers as bad as those of the private sector.

19

That’s not at all what is going on. The question is “do we physically have the money in the coffers to pay the teachers? If not, cut their salaries regardless of the impact on education.” No one is suggesting that teachers are being paid too much in any sort of Platonic sense, and the fact that there are teacher shortages in many places (with uncertified, long-term subs filling their places) suggests that in terms of the market, teachers are paid too little.

20

It could also mean that teachers are too ethical to hurt the education of their students when they are screwed by the politicians. Just like when the money for classroom supplies vanished they paid for it out of their own pockets.