Why Taxing the Rich Is Great

A blog about business and economics.
Jan. 2 2014 10:00 AM

Why Taxing the Rich Is Great

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Boats too, I guess.

Photo by Michael Buckner/Getty Images for Mercedes-Benz

Jaclyn Trop had a great piece on New Year's Day about how the ulra-premium segment of the U.S. auto market has been growing faster than the market as a whole, even during a year when U.S. auto sales did quite nicely. But it's also a case study in why progressive taxation is great:

Matt Hlavin, an entrepreneur in Cleveland who owns seven businesses, mostly in manufacturing, bought three Mercedes last year: a $237,000 SLS AMG and a $165,000 S63 AMG for himself, and a $97,000 GL550 sport utility vehicle for his wife.

Think about how much car a household could buy for the $334,000 that Hlavin spent on the SLS AMG and the GL 550. Then think about how much the life of a household with that much car would be improved by the addition of an extra $165,000 worth of car. You'll see that the gain in welfare is really quite small. If you spent that $165,000 on a moderately frivolous government program, you'd generate a meaningful increase in human happiness. And if you managed to give it to the truly needy in the United States, you'd create a huge surge in well-being. And of course if you were able to use it to reduce severe third-world poverty, the gains would be incredible.

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But the really winning thing about taking some money away from Hlavin is this: if he, personally, had less money, his welfare would only fall a little bit. It would fall some, since he'd have less ability to keep up with the Joneses and show off in front of the Smiths. But if not only Hlavin lost money, but all Hlavin's rich guy peers lost money too, then a large share of Hlavin's modest welfare loss would be clawed back. The kind of conspicuous consumption that drives people to buy a $165,000 S63 AMG is basically zero sum, whereas the kind of consumption that a family in the bottom half of the income distribution would finance with more money is not.

There are a lot of great questions about how to optimally design the Tax Matt Hlavin More Heavily Initiative from the standpoint of overall economic growth. I'd say the taxation should focus on Hlavin's consumption spending more than his income per se, and should be designed to especially hit activities with substantial environmental impacts. But the point is that taking the money Matt Hlavin is spending at the Mercedes dealership and giving it to other people is a huge winner.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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