Cornell economist Robert Frank has an interesting column in the New York Times here (subscription may be required) in which he argues that tax increases for the rich help the rich. If taxes are increased, the rich drive on better roads, for example, without being worse off in competing to buy luxury goods. As Frank explains, there are “positional” goods that are in short supply like gorgeous waterfront property. Tax increases affect “all participants in the bidding for positional goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.”
It would be wonderful if the wealthy read this column and stop its opposition to tax breaks. Frank makes sense, but his counterintuitive message will be hard to absorb. In addition, many of the wealthy want as much money as possible as a symbol of their success and even more important to leave as much as possible for their family. Nonetheless, the overwhelming majority of the public oppose tax breaks for the rich and the revenue is needed even if one focuses on bringing the deficit down. One way or another that popular opinion will prevail even in our broken political system.