Tax the Rich! Tastes Great, Less Filling

Story Stream
recent articles

Tax The Rich! As an applause line it never fails. The desire to equalize economic outcomes runs strong if you believe that the rich got that way by theft, the poor got that way through no fault of their own, and tax hikes don't influence economic growth.

The parade of crony capitalists that looted the public treasury with the help of friends in Washington has only reinforced these beliefs. Intentionally conflating bailed out bankers and corporate welfare kings with the entrepreneurs and business leaders that grow the economy is child's play for populist politicians.

Who doesn't sympathize with the plight of responsible Americans thrown on hard times by the disaster created by the aforementioned looters and their Congressional enablers? Intentionally conflating those honestly down on their luck with legions of liars-loan scammers who worked the system while the getting was good is not hard either.

The choice now facing us is clear. Do we want to use the tax code to indiscriminately punish the innocent alongside the guilty while Washington shovels handouts to worthy and unworthy, needy and not, alike? Or do we want entrepreneurs and executives to put people back to work so we can grow out of this hole even if it means limiting government largesse to the poor instead of the entire middle class?

Even if you prefer the former, raising marginal tax rates on job creators as a means to increase government revenue is highly suspect. It is certainly not a matter of simple arithmetic as some make it out to be - new tax rate times old reported income equals new government revenue. Smart people with money are experts at maximizing their after-tax income. Counterintuitive though it may be, there is ample historical evidence that raising marginal tax rates can reduce total tax payments while lowering marginal tax rates can increase them.

Do you really want to challenge the rich into demonstrating their tax avoidance skills while the economy struggles to climb out of recession? Wouldn't you rather have these people use their smarts to grow their businesses? Grabbing your pitchforks and pursuing their personal income down the far side of the Laffer Curve while you chase businesses and investments out of the country may be emotionally satisfying but it won't generate additional tax revenue.

Obama's decision to abandon any pretense of leadership and instead declare class warfare so he can run off campaigning may be sound partisan politics. As a contribution to the budget debate, however, tossing the ball back to warring Congressman can only marginalize the President's influence while making everyone else's job harder.

Agree with his remedies or not, Paul Ryan has at least forced the body politic to recognize the fearsome size of the entitlement Tsunami bearing down on us. This despite the fact that he made the cowardly political decision to leave Social Security off the table, at least for now, focusing only on Medicare and Medicaid. If the first step in solving a problem is recognizing that it exists we have at last arrived at square zero. When it comes to the federal budget everything outside of entitlements is a sideshow.

This is not to say that cutting military spending isn't important, it is. We are too broke to ask taxpayers to continue paying for the defense of rich countries like Japan, Taiwan, Korea, Western Europe and, yes, Israel. But defense spending differs from entitlement spending in that it does not grow exponentially on demographic autopilot. It can and should ebb and flow based on the need to respond to real threats to our country as determined by each and every President and Congress.

Claims that the entitlement state can be fixed with marginal tweaks are no longer credible. Entitlement disaster deniers who think taxing the rich is the path to prosperity need to consider the fact that if you confiscated 100% of the income of every American making more than $100,000 a year you would not even cover Obama's budget deficit for this year.

And the rose colored glasses argument? "Tax rates were higher under Clinton and the economy was booming! Let's go back to those good old days."

If life was so grand in 1999 that you want to take us back there, you have to take government spending down to 1999 levels too. Do that and the economy will boom and tax revenues will soar without the need to raise marginal rates. Yet Congress can't even find the wherewithal to roll spending back by two years much less a decade.

It's Bush's fault! Yes it is, along with every president that came before him from both parties stretching all the way back to FDR. Like Bernie Madoff they all promoted the illusion that unfunded entitlement promises can be made in perpetuity. Obama fits squarely in that tradition, no change here.

Bush was the most profligate spender in American history! Until Obama came along and pulled out all the stops. No change here.

There is one key difference. No other president came close to collecting more taxes than George Bush, nor did any ask the rich to carry as large a percentage of the nation's total tax burden. And he did that despite, and some say because, he lowered marginal tax rates. Oddly enough, I don't recall the rich doing that much complaining. Perhaps they were too busy growing the economy.

Barack Obama can only dream of fleecing the rich as successfully as his predecessor. By focusing on maximizing tax rates instead of tax revenue he makes his job harder. Which is why his base may think class warfare tastes great, but when it comes to the treasury it is sure to be less filling.


Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

Show commentsHide Comments

Related Articles