While I’ve been listening to political discourse for a while, some of what has been coming out of Washington lately is enough to make me blow a gasket.
Let’s start with a basic truism; If you want less of something, tax it. If you want more of something, subsidise it.
If you want less of something, tax it. We see this with “sin taxes” like those on alcohol and tobacco. We also have seen this when government wanted to decrease gasoline usage, so they increased taxes on it.
If you want more of something, subsidise it. We subsidise farms so they won’t close, and we subsidise steel, “green energy” and medical research because we want more of it. While not a subsidy, you could even make the case that we encourage marriage, children and home ownership by providing tax deductions for those who engage in them.
Now it is a political given that the progressive nature of the federal income tax rates are put in place to make sure that “the rich pay their fair share.” While I have heard many arguments about who is rich and what is fair, there’s one very basic concept that seems to be missed: We have an INCOME tax not a WEALTH tax. (Actually, we have two, since we have a capital gains tax as well.) In other words, we don’t tax wealth, we tax the ability to acumulate wealth.
Here’s an example. Let’s say you are a very wealthy person, worth $1 Billion. Now you have a choice; you don’t have to work for a living, but you do have to decide where to invest your money. Let’s say you invest in some companies, buy stocks, bonds and real-estate. Let’s also say that the average return on your investments is 2%, or $20 Million per year (a pretty weak return, but let’s go with it). However, we have income and capital gains taxes, so once you’re done paying the federal, state and possibly city/local taxes, it can easily add up to a 50% effective tax rate. You probably created some sort of corporation to allow you to manage all that money flow and investments, which will also pay a 35% tax. And don’t forget, with a tax form that complicated I’m sure you have tax accountants to keep track of all the forms and formulas, and tax lawyers to pour through all the legal mumbo-jumbo in the tax code. What does that cost? By the time you’re done you probably get to keep $5M-$7M of the $20M you actually made. But remember, you don’t have to work: You’re a billionaire.
So, what if you took the $20M and simply invested it in tax-free (treasury & municipal) bonds instead. These bonds don’t usually perform nearly as well as other investments, so let’s say they get a 1% return or $10M. But because they’re tax free, you don’t have to pay taxes, fill out too many forms, or hire all those accountants and lawyers. You simply get to keep the $10M! In other words, the wealthy can afford to avoid income taxes.
On the other hand, most everyone else does not have the means to live off of tax-free investments because they have to work. When they work, they earn income. When they earn income it gets taxed. And when they take what little they can save after taxes and invest it, the gain on the investment gets taxed. In other words, the tax code is setup to allow fewer people to get wealthy.
Now lets look at the current discussions going on in Washington. One big question is who, if anyone, do we increase taxes on? Or, put another way, what type of people do we want fewer of? Do we want fewer people making $250,000? Do we want fewer people making $1M? Do we want fewer corporations doing business in the U.S. (through corporate taxes)? Do we want fewer families able to leave something for their children (like money, businesses or farms) through estate taxes? And while that is going on, what do the political class in Washington show they want more of? They’re working toward more unemployed through additional unemployment subsidies. I have great sympathy for those who have lost their job through no fault of their own. Realistically, there will always be those who take unemployment payments only grudgingly and others who will manipulate the system to continue getting benefits. But extending benefits for those who have lost their jobs and giving them more time on the government dole will encourage some to wait longer to try to find a job or turn down a lower paying offer in hopes of getting a better one.
Don’t pay attention to what is being SAID in Washington, look at what the effect is of what they do. Just watch out, you may blow a gasket as well.