Psychology in Raising Taxes on Wealthy vs. Lowering for Middle Class

While I find political rhetoric uninteresting, I believe tone to be rather important to what policies are implemented. Whatever policies are implemented, it will be very difficult to pull out. This brings forth the tone on taxes.

Whenever and wherever a wealth gap erupts between the upper class and middle class it seems the popular tone is to penalize the wealthy. Maybe penalize makes it seem like I take the stance the wealthy are being treated unfairly. In some ways, yes.

Capitalism is probably the best system we have to push growth for humanity. Such a system incentivizes the compounding of wealth as well. So it’s only natural it produces really wealthy people.

In a truly capitalistic society, you should see a rotation in the wealthy. This seems to be the case in the U.S. with the billionaires of today being different from those a century ago. When I look at the richest individuals in the U.S. in late 2020, the first nine are entrepreneurs with the following three the descendants of Sam Walton and they seem to be the outliers there.

Such a system where the leaders change seems better than the old one of aristocracy where one had no chance of elevating one’s status to be in the upper class. But alas, it’s always easy to appeal to the envy of humanity.

Envy and jealousy are easy to exploit and many politicians seem to know how easy it is to turn the majority against the minority of wealthy individuals. Even if such individuals include entrepreneurs who are providing greater consumer surplus to the majority.

This probably makes it easier to sell the idea of increasing tax rates for the rich. It'll also fly off well for those within government too since a government body really does one thing: spend money. It collects taxes from everyone and spends it for themselves and the public.

From what I’ve seen from folks in the gov’t is that priority is always self-perseveration and then the public. I can’t blame them for it is part of who we are as people. We are programmed to take care of ourselves and our family first. But yes, this causes all sorts of problems for those whose job is to spend for public service.

I’m just stating most people in government are incentivized to up the taxes and increasing it on the really wealthy will fill up their coffers the fastest. It makes sense. Naturally, this is short-term and I believe if the process is repeated, it will lead to the decline of the capitalistic system that made the economy prosper.

This is also simple. If I earned ~$4M a year, yes a 60% tax rate will still leave me with a lot of money. But you bet if there is a way of spending some $ to pay less in taxes for a net gain I will do it. If I was that rich, I’m probably investing my wealth too.

Eventually, it’ll be too onerous and people will leave to live in a different country, or at least divert assets to start. People may stop wanting to start companies too.

But really, I think most people want to see higher taxes on the wealthy to make themselves feel a little better. To know that the wealthy are losing more in taxes than they are. Possibly forgetting the absolute differential in income.

Rather, if one were to use tax policy to enhance wealth in the middle class, then a policy of reducing taxes would seem to be the proper course of action. It’s often said the middle-class is the backbone of an economy and if that is to be true, the government should take less from them.

Now, doing so will reduce the amount the gov’t has to spend and there are views that this will increase the federal debt due to the lowered funds. But that’s like my overweight 10-year-old self demanding more doughnuts because I’m used to eating a half dozen at a time.

Objectively, being overweight is unhealthy. Regardless of the loud minority voice saying it’s beautiful it is still unhealthy for human biology. Science first. Hence, it made sense for me to lose all that weight. I am a much happier person now as a result of it. But that meant not eating all those doughnuts, cutting the daily coke intake, etc…

Same for the government. I see it as being overweight with bureaucracy and the ample tax revenue is the doughnut habit it has to kick. Why do I think it’s overweight?

Well, I’m extrapolating. But of all my friends who work/worked at the government, the smart ones all left to pursue work worth doing. The ones who stayed or sought it out tell me they believe they don’t add value, they don’t know what their job is supposed to do, and it’s a great way to do nothing and get paid.

In fact, a friend specifically told the recruiter he wanted a job where he would do close to nothing in a low-stress environment and get paid a decent amount and he went to the government. He also told me he parlayed a similar answer in the interview and he still got hired. If that is not an overweight organization then I don’t know what is.

I imagine lowering the tax rate is the constraint to impose on the gov’t’s lofty spending and one driver to force the cutting of the fat. Yes, this would mean my friends who wanted to do nothing will probably lose their jobs but de-incentivizing such a mindset is another plus. They will either join an overweight profit-generating organization like a bank (which is the better of two evils) or do something that will contribute to the economy in another way.

It just seems to make the most sense to strive to lower taxes on the middle class than to increase it for the upper class. It seems to be a better way to strengthen a nation’s economy for the long term whilst cutting away at the bureaucracy. Now, yes there could be some stupid decisions made like cutting budgets in education and healthcare instead. You would think cutting middle management would be the obvious place to focus the cutting-lens but it’s true that important healthcare programs may suffer. To that, I can only hope the public and those within can knock sense into the decision-makers.

This will probably and should be, taken in as a naive thought by someone who does not run a country or can even comprehend the stress of such a task. People love to cite the Nordic countries as the value of high tax rates but it seems like countries like Denmark, Sweden and Finland have all been lowering tax rates (though they did start high but their system isn’t as socialist as people think).

I do believe a country should provide the basics for modern life like education and healthcare. But after that, they would do well to trust the middle class to use their capital to build wealth for themselves instead of having the gov’t take it to feed its inefficient organization.