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Why raising taxes on rich people won’t work
Perspective on the News
Friday, August 19, 2011
Ed DeShields

The social justice era is in full bloom.  As politicians try to sort out at which door we must lay the blame of our financial ruin, the political solution will be neatly wrapped in social justice and delivered to society marked C.O.D. (collect on delivery).

Social justice spawns anger from the have-nots. Almost every day now, from all over the world, we hear about flash mobs attacking retail stores to rob from the rich.  Just last night a family friend called to say his son was held at gunpoint and robbed of his money and car by a flash mob while they hit a convenience store near our home.  “Rich boy,” they said, “had me your keys and your wallet.  Now I’m rich.”

The new Obama campaign strategy seems to be a delicate differentiation of politics vs. government.  His social justice slant says that all the bad things we’re seeing are simply politics, not government inefficiency and mismanagement.  After all, isn’t government there when we need it?  Yea!  Isn’t it our social security and fire fighters and unemployment insurance at work?   Yea!  Separating politics (bad) from government (good) is a way to suggest government is working and politics are broken.  What it is, however, is a way to get re-elected if your constituents aren’t paying close attention. 

You have to love the sound of it.  Tax the rich people (not me)!  At face value, it seems fair to most of us, doesn’t it?  Rich people can afford it.  

Only it won’t work.  So says the Internal Revenue Service (IRS).

The historical data available from the IRS says that raising income tax rates on the top 1 percent of income earners reduces direct tax receipts.   If you consider the secondary tax revenue effects the result is even more negative.

Lets say you have a billion or two.  If you’re an investor – and you are if you have that kind of money – you’re going to put it to work earning more.  If the government takes some in the form of taxes that money isn’t put to work.  It’s lost and therefore doesn’t earn anything.  Giving to the government is the least efficient means of investment because its equity value is consumed and lost. 

But consider the results when money is put to work (by so-called rich people).   In recent years, the U.S. cut the highest marginal earned-income tax rate to 35 percent from 50 percent, the highest capital gains rate to 15 percent from about 50 percent, and the highest dividend tax rate to 15 percent from 70 percent.

And, who led this campaign to cut taxes?  None other that President Bill Clinton. You will remember it was President Clinton who actually balanced the budget during his last term.  Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0 percent for homeowners and the housing industry took off.  Almost every other income tax rate has been cut as well. 

Those tax decreases raised income tax receipts from the top 1 percent of income earners to 3.3 percent of GDP in 2007 versus a mere 1.5 percent of GDP in 1978 (the Carter era). 

Who are rich people?  Corporations are people.  The idea that we should heavily tax corporations is as destructive as flash mobs.  As an example, Google offered to buy Motorola today for $12 billion.  They’ll use Motorola’s 17,000 patents to create hundreds of new products and businesses employing many thousands of high paying tech jobs.  Fresh capital will create new businesses that will earn profits and a portion of those profits will be paid to people who own stock in Google.  People.  Regular people and rich people.  And, investment managers hired by people to figure out their investments.   

Social justice says otherwise.  Instead, benefits like extending unemployment benefits are touted as a way to get the economy going again.  Really?  A spokesperson for the Obama administration explained that benefits to the unemployed boost the economy.  The unemployed don’t save; they’ll spend their government check.  Figure that. 

I’m all for helping anyone down on their luck.  But last year our government paid out over $8 billion to people who didn’t actually qualify for unemployment.  Why don’t we fix that?

Another case in point: This week our company received an application for credit from an applicant.  When asked about their occupation they said, “unemployed”.   The applicant then described, in great detail, how as a member of the (an unnamed) union they work in the convention services business.  Some weeks they work and received income from their work.  But conventions don’t come to their town every week so they apply for, and receive, Federal unemployment compensation.  She added, “I’ve been doing this for 20 years!”

The way to turn around the economy is to make productive activity, including investment, more attractive by keeping tax rates low -- not by allowing them to go up.  So says the IRS.     

Social justice is a dangerous concept.  If promoted as an entitlement we’ll eventually be unable to contain it.  Unfortunately, we’re going to hear a lot about social justice in the next 15 months leading up to the Presidential election.  

We’d better hire more police.

About Ed DeShields

Last week: Debt Man Walking



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