The Genius of Capitalism and the Tax Cut Debate


Capitalism is based on the theory that given adequate financial incentives to produce, human ingenuity is capable of coming up with almost everything. You can see a good example of the truth of this, I think, in America’s long-standing debate over whether or not reducing taxes on rich people is a good idea. Rich people, by definition, have a lot of money. Consequently there’s an enormous quantity of direct and indirect demand for policy ideas that serve their interests and flatter their prejudices. And much as theory would predict, recent years have seen an enormous blossoming of arguments about why rich people should pay less in taxes.

There’s a certain beginner’s level of this. Here, when progressive tax policy has been in place during a period of growth, and that growth has led to a budget surplus, you argue not that it’s smart to balance the budget over the course of the business cycle, but rather that the surplus reflects the government “overcharging” in taxes that should be returned to those who pay the most taxes; which is to say to those who have the most money; which is to say to the rich. That’s a 1999 argument. Then if the economy falls into recession wiping out the surpluses, you argue that a tax cut for the rich is needed as economic stimulus. That’s a 2001 argument. And if the economy is growing during a period of conservative tax policy, you argue that the low taxes produced the growth so need to be kept in place forever. That’s a 2005 argument. And then if the economy falls into recession again, you argue that additional permanent tax cuts for the wealthy are the only solution.

Ta-da! That’s a little business cycle mojo.

But true artists can come up with more innovative arguments. On Friday, for example, I heard someone say that the reason it’s important to cut taxes on rich people is that economic growth comes from people starting new businesses and most new businesses are financed by borrowing money from family—a rich uncle, for example. Therefore, the richer our rich uncles get, the better off the rest of us will be. After all, we can hit them up for loans!