My friends and I were having a healthy debate about taxes, when one of them presented this hypothetical scenario:
What would happen to the American economy if anyone earning over $250,000 and living in America decided to just leave, and take their money with them?
Let’s assume that they form a club and pool their resources to secretly create a space craft a la the USS Enterprise, so that they can fly around the galaxy with roomfuls of money, listening to Mozart and reciting Shakespeare, and solving noir murder mysteries on the holodeck.
Certainly there would be an immediate impact, but would it mean complete unrecoverable economic collapse? Those earning more than $250,000 per year make up just 2% of households. Presumably, that would still leave almost 300,000,000 people living in America. Would hundreds of millions of people be horribly financially crippled without the tax revenue generated by only a few million people? Would America not be able to survive without them? And if so, shouldn’t we be working to reduce our dependence on them?
Note: The implied position does not necessarily reflect my own opinion. Also, I know tax debates come up all the time here, so I apologize in advance if this is a repeat of another discussion.
The rich professionals would be replaced by younger, poorer professionals, who would soon become rich themselves.
People who are rich becuase they own businesses or property, well, that depends on what happens to the businesses or property. You said that the rich would “pool their money”. But rich people often don’t have much money - what they have is assets. What will become of their assets?
Well, actually I said that they would pool their resources. But to be clear, let’s assume that all of their worldly possessions are taken with them, if it is possible to do so. So land and property, for example, would remain, but that Picasso is now hung in their cabin on the space ship. As much stock as possible was sold, and bonds and other long-term financial assets were cashed in.
Let’s also assume that through some sort of resource sharing magic, the ship itself actually cost very little to make, so there wasn’t a great influx of money coming from that.
Who would they sell them to?
My point is this: unless the businesses are dismantled or all the assets sold overseas, things will essentially continue as before. They’ll be a brief period of chaos, and at the end they’ll be a whole bunch of new rich people who will fill the old ones’ niches.
Why would they bother taking their money? They are going to go live on a commune. I don’t know what you envision the economy of the commune being, but once they separate themselves from the US, the only real value that they will be taking is any physical possessions or resources and their intellectual property.
The value of a US dollar is present only to the degree that it is still connected to the US in some way. Those who remain will simply replace those dollars, and individuals will replace the individuals who departed.
The OP seems like a Galt’s Gulch scenario, but with a focus not on the unique individual intellectual contributions of the communists, but for some reason on the actual money they would take. Once that money is separated from the US, it has no other worth.
Yes, but that’s sort of the point. Perhaps they intend to use the currency in their newly-formed commune. Perhaps they took it just out of spite. But for whatever reason they decided to take it, would we just print more to replace what was taken? If so, who would the money go to?
I suppose the heart of the question is this: if the top 2% wasn’t around anymore to tax, how would that impact the American economy? Would it be as simple as saying that new people would take their place and become the new top 2%? We would just get new billionaires and things would continue as they currently are?
It seems to me that it would create an opportunity for the class disparities to level out a little bit. My friend was insistent that America would just sink into a black hole of despair and we’d all die poor and bankrupt.
How would the federal government react to a drop in income tax revenues of around 40%? (cite). This does not include capital gains taxes.
Of course a lot depends on how they would “take their money with them”. Dumping all their stock holdings at once would probably crash the market unless the exchanges shut down. I doubt you could sell a lot of high-end houses at once - they would probably sit there unsold. There would be less impact on semi-regressive taxes like Social Security and Medicare, but the rich would not be available to tax to recover the Social Security funds that have been spent, so I am guessing Social Security would collapse or be radically cut back.
I would say it probably would be rather dicey times for a decade or two, until and unless we develop some more geese to lay golden eggs for us.
If they took it out of spite, they’d be really, really stupid. Money represents something of value, but isn’t value in and of itself. The resources that back the value of that money would largely remain here. We’d experience no greater pain as a result of their absconding than the loss of the intrinsic value of the material used to represent that currency.
I suppose the most practical solution would be to have those resources reclaimed by the rest of us through the government, and then redistributed as makes the most sense. Probably, through a bidding or auction process, I suppose, meaning that those in the upper end of the lower 98% will have an advantage in acquiring those resources.
I think in the short run disparities would even out a little bit, but ultimately without any changes in the system, it seems to me that things will develop in the same direction.
Hard to say, other than the rather colossal administrative pain in the ass created by the forced nationalization of basically every industry (how else are you going to divvy up the remaining property?).
Obviously, some extant businesses would be run into the ground by their new owners/operators, a la Zimbabwe. Some would probably do better because dead weight at the top would be cut.
Ultimately, I think things would be a mess in the short term, and balance out somewhat in the long term. Lots of the people making $250,000 inherited lots of stuff, or are grossly overpaid, but lots of them are immensely smart people we’d have a hard time replacing.
Fortunately for those of us Left Behind, far more immensely smart people are not making above $250K per year. The top 1% to 2% of income earners does not correlate at 1.0 with the top “smartness”.
Of course, we’d have to find a lot of replacement football, baseball, and basketball players and film and tv stars, but I think we might be okay.
I’m sure that areas with higher costs of living would be disproportionately impacted, temporarily, but there’d be plenty of good doctors and engineers Left Behind.
Do you mean Buffett? We were discussing what would happen when Buffett and everyone else like him suddenly disappeared, along with all the taxes they pay as well as their assets. I suspect that will have a much greater impact than simply when he dies. Because it is happening all at once.
At best, we have a serious medium-term problem. People don’t generally reach $250K per year five years out of college. It’s going to take a while not only to regenerate the assets that Buffett controls and uses to generate his income, but also for the doctors and engineers and so on to get the training and experience to command salaries at the $250K level.
All the while trying to run a federal government that has taken a major hit to its revenues.
That’s a fair point, but keep in mind that this is a median. And it depends if we count only salaries, or gross income.