The Taxman Cometh

Professor Robert Frank is up to his old tricks. In his recent New York Times article, “Hey Big Spender: You Need a Surtax”, he proposes new taxes on the top 1% earners in the United States. According to Frank, his plan would “give an immediate burst of non-government spending and simultaneously create a painless new revenue stream for balancing the US budget”. His plan has no prayer in succeeding. His logic starts out by increasing taxes on the highest spending consumers to drive down consumption and increase savings, which is in direct conflict with his “burst of non-government spending” theory. Oh yes, Frank would make the tax effective next year so that rich folk would be “powerfully motivated” to load up on “mansions and yachts” before the tax hits. More rubbish. In my opinion, Frank’s proposal fails to calculate the spending habits of big earners, existing loopholes in the tax code, and a myriad of unintended consequences. Just look at what the VAT tax has done to Europe and the destruction to consumer confidence.

Frank also proclaims that the estimated $50 billion in additional tax receipts will help balance the US budget. He has to be joking. That is a drop in the bucket compared to the present budget deficit, which is estimated to reach $14 trillion dollars by the end of 2010. The bottom-line regarding a balanced budget in the United States is that the vast middleclass must pay more and the government must spend less. There is just no other way around it.

Gimmicks like Frank’s sound painless, because they target the so called greedy, spend-crazy rich. But these people tend to be the ones creating jobs, starting businesses, allocating investment resources and yes, spending money in our consumption driven economy. Using the tax code to engineer Frank’s or anyone else’s social agenda is simply misguided. I do believe Frank’s tax strategy could create real behavioral change if it was part of a total overhaul of the tax code. Replacing an income tax with a consumption tax clearly has its merits, if implemented fairly. But band aids can’t repair a hemorrhage. I suggest that “Robin Hood Frank” stop trying to punish the rich, for whom he clearly has disdain, and concentrate his efforts on something more meaningful.