Krauthammer and Williams have this one wrong.

Charles Krauthammer and economist Walter Williams are among a chorus of voices who appear to be more tolerant of higher tax rates on the wealthy.  Both have pointed to the Eisenhower administration and the very high marginal tax rates on wealthy Americans.  While it is true the tax rates in the 1950's were very high, the comparison is not really based on good data.  The reason I say this is that during this period of time, much of the worlds manufacturing and transportation abilities were in the process of being rebuilt after World War II.  In other words, higher tax rates didn't have much of an effect on our exports or domestic production, because there was so little competition.

Today the United States not only competes with Western Europe, but also much of the Pacific Rim, and Eastern Europe.  Small businesses also make up a higher percentage of wealthy Americans.  So some of the "income" we are taxing, is actually just money in a business carried over from year to year.  When marginal tax rates are raised, these small business owners have less to invest, and less of a security blanket.  The loss of that economic security blanket is going to lead to a higher unemployment rate. 

But there is more to the story.

When you read Adam Smith, Karl Marx, or John Maynard Keynes, it is clear that much of the problem they are trying to solve economically revolves around the division of a labor.  The problem was that when most (or at least a large portion) of the world is gainfully employed in a rather menial job, an economic system is needed to allow them to prosper and keep hauling the economic load.  Today the problem is going away.  Just fifty years ago a worker out of high school could find a factory, and insert themselves in to one small piece of the factory, and make a pretty good living. The employee contributed to the bottom line of the company, and so was employed for a long period of time.  The end result in many of the capitalist countries and even some socialist countries, was nearly 100% employment.

Today this is changing very rapidly  Now you must insert yourself in to the economy at large and provide a good or service that is profitable, or assists someone else who is profitable.  When I work in very large companies today I'm always amazed at the number of people employed, who don't directly contribute to the bottom line.  It has been this way for ten or twenty years.  By my estimates (and this is rough I realize) about ten percent of the workforce are engaged in supporting a team or individual directly related to the production of the good or service.

Technology is quickly making these people obsolete.  Let's look at two examples. The first is the project manager.  Through most of the nineties, and even in to the early part of this century, project managers are required to keep large, complex projects on track.  Large enterprise software development implementations can have dozens of project managers.  Project management software has made this task a little easier for the project managers.  But lately as new tools are added to the mix, and the management software itself becomes more efficient, the need for project managers is starting to dwindle.   We're not there yet, but you can see it coming, and coming fast.

Another example is in human resources.  A department that in the past may have required fifty people or more in even a moderately sized company no longer requires so many employees. As new regulations or rules are introduced, software can be instantly updated to reflect the changes.  Again, this requires less people.

So what am I getting at here?

The fundamentals that the capitalist system have been built on are rapidly changing.  What "indoor" economists don't realize, is that the tax is already being paid.  Low tax rates are allowing small businesses to retain employees they can actually live without.  It's just that right now the investment in the tools and time required to replace the employees, is higher than the employee cost. As marginal tax rates go up, these investments look much more promising. 

Is redistribution of wealth the answer?  In the past, the answer may very well have been yes.  Someone had to do the low wage jobs, and we needed a way to make that attractive, so the safety net was created through higher taxes.  The cold hard fact is, we don't know the best way to handle this change in the structure of the global economy.

The Obama tax increases could wreak havoc on the entire system.
As taxes on small businesses go up, I'm afraid that many of those on the outside of the production chain will be the first to feel the pain.  But they won't be the only people in danger of losing their jobs.  These higher taxes will put pressure on local and state budgets, as voters are less likely to support tax increases they can more easily oppose.    When this happens, I believe we are going to see a fundamental change in the operation of education in this country.  If there is one area where technology should have drastically reduced costs, it is in college education.  High speed connections and incredible advances in interactive video technologies render many college professors completely obsolete.  They have their jobs, because tax rates are low, and citizens are willing to pay for them.  But the truth of the matter is that the state of Ohio (just as an example) actually only needs one professor of American History.  He could broadcast his class to every college classroom in the state.

This is just the tip of the iceberg.  Suffice to say that logic dictates that looking to the 1950s to derive a tax plan for the twenty first century will certainly have consequences beyond what is being considered even by the best minds in the world.   To solve these problems we're going to need to look to the polymaths of today. We need people who understand economics, but also understand the incredible changes technology is having on the world, and on the wage earners.

Walter Williams and Charles Krauthammer are both brilliant men, but I'm afraid on this one, they aren't close enough to action to see that things are changing in ways we didn't really consider.

Eric Gurr
gurreric@gmail.com