How higher taxes will make the rich happier

Few of the United States’ most successful people would have done nearly as well if they’d been born in South Sudan. That’s why our social contract asks those who’ve succeeded to support similar opportunities for the next generation. Yet, many are reluctant to acknowledge how lucky they’ve been. As E.B. White wrote, “Luck is not something you can mention in the presence of self-made men.”

Being born into a society that invests in schooling, infrastructure, research and its legal system is an enormous stroke of good fortune. And, unlike individual luck, which is inherently random, societal luck is one of the only dimensions of good fortune we can control. But we’ve been doing a bad job of maintaining the social contract for at least a generation. Our infrastructure is in tatters, and we’ve all but abandoned our cherished goal of equal opportunity. Students from wealthy families with bottom-quartile scores in math are actually more likely to graduate from college than those from low-income families with topquartile scores in math.

Yet, proposals to increase investment in the public good have gained little traction of late, largely because people see no politically realistic way to pay the bill. That unhappy perception is based in part on the seemingly plausible, but essentially false, belief that higher taxes make it harder for prosperous people to buy the special things they consider to be their just reward.

Here's why that's a false belief: To get those special things, which are generally in limited supply, people must outbid others with similar tastes and incomes. Because higher taxes would leave all bidders with less to spend, prized possessions would still go to the same people as before.

In contrast, if you alone experience an income decline, you really are less able to buy what you want. If you suffer the loss of a job, or a divorce, or a home fire, for example, you’re less likely to be the winning bidder on that waterfront property. It’s natural to think of higher taxes having a similar effect. But when your disposable income declines in tandem with that of your peers, as happens when taxes go up, everyone in the group is in the same boat in terms of bidding power.

Even for the prosperous, getting something “special” depends far more on relative rather than absolute spending power. The increase in private wealth of top earners over the last 40 years has simply raised the bar on specialness. For example, the average American wedding has gotten more expensive over the last 40 years. It now costs more than $30,000, three time as much as in inflation-adjusted dollars in 1980 — an increase that does not seem to have made marrying couples any happier. It’s like when all stand to get a better view, only to discover that none sees better than if everyone had remained comfortably seated.

If instead of continuing to see the bar get raised we would spend more on productive public investment, families all along the income scale would benefit enormously. And those at the top could still get extravagant nuptials, relatively speaking.

As an illustration of how increased public investment would deliver good value, even for the top earners who would bear much of its cost, consider this thought experiment: Which experience would a wealthy car enthusiast prefer, driving a Porsche 911 Turbo (purchase price, $150,000) on smooth, wellmaintained highways, or driving a Ferrari F12 Berlinetta (purchase price, $333,000) on roads riddled with foot-deep potholes?

Let’s assume the Ferrari would be judged the better car if both could be driven on good roads. But it wouldn’t be much better because the $150,000 Porsche already has most of the design features that affect performance significantly. The economist’s law of diminishing returns operates here with a vengeance. Beyond a certain point, it reminds us, the cost of achieving additional quality improvements rises very steeply. So, if the Ferrari enjoys an edge, it’s at most a tiny one. How, then, could anyone reasonably argue that it would be more pleasing to drive the Ferrari on pothole-ridden roads than to drive the Porsche on well-maintained ones?

Now, however, the quality mix of high-end cars and highways in the United States more closely resembles Ferraris encountering potholes than Porsches on smooth asphalt. That the latter combination could be achieved at much lower total expense implies that wealthy drivers have missed an opportunity. Because relative performance is what counts, the Porsche in a world with greater public investment would seem just as special as the Ferrari in a world with lower public investment. In short, by investing more heavily in the public sphere, wealthy car enthusiasts could enjoy a vastly better driving experience for less outlay overall. The same logic applies to other forms of public investment.

So if you've prospered under the American system, embrace the good fortune that is part of your success and be grateful that you’re able to help the next generation enjoy some of the same opportunities you did. It will be much less painful to pay the bill than you thought.

If we increase public investment, everyone will benefit. And the top earners can still afford the special things they consider to be their just reward.