How Cutting Taxes Makes Life Worse for the Rich

https://www.nytimes.com/2017/11/17/business/tax-cuts-rich.html

By ROBERT H. FRANK NOV. 17, 2017

The Republican effort to cut federal taxes is still underway, and many crucial details are still unsettled. But little doubt remains that the effort has been heavily shaped by wealthy donors.

As Chris Collins, a Republican representative from New York put it: “My donors are basically saying, ‘Get it done or don’t ever call me again.’”

Many affluent people are likely to celebrate if an eventual deal in Washington grants them big tax breaks. Evidence suggests, however, that their jubilation would be short-lived — and followed by deep disappointment.

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The mistake occurs because “special” is an inescapably relative concept. A spacious home is one that is larger than most other homes. A high-performance car is one that outperforms most other cars. Successful bidding for such things depends almost entirely on relative purchasing power. Taxes affect absolute purchasing power, not relative purchasing power. The upshot is that the ability of the already rich to bid successfully for special things is not enhanced by tax cuts.

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The standards that define “special” are therefore highly elastic. When everyone buys larger houses and faster cars, or stages more elaborate wedding celebrations, standards adjust accordingly.

Failure to appreciate that reality has also contributed to the tax resistance that has made it so difficult to restore America’s crumbling public infrastructure. Even proponents of minimal government concede that private cars would be of little use without public roads. And although it’s difficult to reach agreement on the best mix of public and private spending, studies show that the current mix in the United States is strongly biased against public spending.

My research on this issue over many decades has identified the following thought experiment as an instructive way to view this problem.

Imagine that you are a wealthy car enthusiast facing two options: Driving a Porsche 911 Turbo (purchase price: less than $160,000) on well-maintained highways, or driving a Ferrari F12 Berlinetta (purchase price: more than $320,000) on roads riddled with foot-deep potholes. Which would you choose?

It’s an easy question. Suppose that the Ferrari would universally be judged better if both cars were driven on good roads. But since the Porsche already has every design feature that affects performance significantly, the Ferrari’s edge would be tiny at most. No one could reasonably claim that the Ferrari would be more pleasing to drive on pothole-ridden roads than the Porsche on well-maintained ones.

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Tax cuts for the wealthy would not alter the supply of special things to be had. And by increasing government deficits substantially, they would degrade our infrastructure in ways that would harm even the ostensible beneficiaries of those cuts.

In short, cutting taxes for the wealthy is a losing proposition — even for the wealthy.