Taxing the Rich

                 It has been a couple weeks since President Obama made his job proposal so perhaps the numbers have changed but the analysis is the same. 

                The plan was to cost $460 billion and $400 billion was to come from taxes on the rich.  When considering this tax the wisest question to ask is: “What would the rich have done with that money if it had not been taxed?”

                The answer is the rich would have spent it, invested it, or saved it.  Spending it and investing it puts it directly into the economy.  Saving routes the money through savings institutions like banks before it is loaned to the economy so saving puts it indirectly into the economy.  Thus President Obama’s plan is to remove money from the economy so he can put it back into the economy.  As some have noted it is like taking water from one end of a swimming pool and pouring it in the other end and expecting the pool to get fuller.

                But it’s not exactly like that.  The rich put it pretty directly into the economy.  President Obama’s plan would route the money through a highly inefficient government.  So the swimming pool illustration should go like this.  You take water out of one end of a pool using a leaky bucket and then walk to the other end of the pool with water leaking out the entire time and then you pour the remaining water in the pool.  Then you expect the pool to get fuller.

                I believe the above analysis is not perfect but it is largely true.  The question about what would the rich have done is one of the two questions that needs to be asked more often regarding public policy.  The other question is, “What are the long term consequences?”