Who Is Really Hurt When We Tax the "Rich"

Written by Jesse Mecham  |  on

It is unfathomable to me, in the midst of an economy that is wavering, to hear the presidential candidates talking about tax increases! How can anyone who looks at things from a rational, logical perspective think that increasing our taxes is going to help? Of course, I know that they want to give an economic stimulus in the near term, but an increase in taxes will completely destroy any benefit that a stimulus will bring.

How Would You Like a 64% Tax Rate?

Believe it or not, this is what is being offered as one of the “solutions” out there. First, they are talking about eliminating the cap on the Social Security tax. That would mean that every dollar of earned income would be taxed at 15.3%, without limit. Next, they are talking about bringing the top tax rate back to 39.6%. Finally, if you live in a high income tax state like Oregon or California you will pay another 9% (9.3% in CA). So, here goes the math: 15.3 + 39.6 + 9.3 = 64.2% marginal tax! That doesn’t even count the sales taxes, property taxes, etc., etc. Does it sound good to you to go to work and know that out of every new dollar that you earn you will only take home $0.35? Add CA sales tax to that and you are left with $0.32. Add in gas tax, property tax, tolls, license fees, business taxes passed on to consumers, phone and utility taxes . . . this is legalized theft!

Yah, But Only the Rich Pay That Much, and They Can Afford It

Please, don’t ever say that in my presence. There are too many things to say about this to fit in this entry. Let me put it to you this way: How on earth do you think the not-so-rich get their money? See if you can follow this logic:

Tom is a wealthy man who owns a successful business. He wants it to grow. He also needs to support his family. He needs to take home a certain amount of money to do that. Beyond that, the money that he earns will be invested back into the business so that he can make even more money. He knows that as his business grows to certain points he will need to hire more help because he just can’t do it all himself. That is okay with Tom because he plans to make more money by growing the business than it costs him to hire someone (otherwise he wouldn’t do it). Now, with more help Tom is able to make even more money. He takes some of the extra home, but also reinvests the rest of it into the business in order to grow even more. In the process he is providing more jobs.

Next comes along a new President and Congress. They increase Tom’s taxes by 15% (because he’s “rich”). Now Tom has a choice. He can do the same amount of work and watch his income decrease by 15%, or maintain his lifestyle and lay off some of his employees? Remember – Tom’s a selfish rich guy. So, he fires some people.

Who got hurt by the increase in taxes? Who can afford a tax increase, or more importantly, who can’t afford one? Now, a bunch of not-so-rich guys are running around without jobs and without money to spend. This begins to make the economy worse because there is less spending (both from the out-of-work guys and those who are afraid they might be out of work next week). Also, more people apply for government help. Those people are also not paying taxes anymore because they aren’t making money. Now the deficit grows and the government needs to make it up by what? You got it! Tax the rich!

You can replace the rich guy in that story with “Big Oil” or whomever you want. The only people that get really hurt by tax increases are the ones who think they aren’t paying the taxes. And yet they are the ones who get duped into voting for them.

The Biggest Problem

The problem with this whole scenario is that it takes a while to play out. The changes don’t take effect immediately (except on Wall Street). They often take years to fully appreciate. So if today’s Congress and Whitehouse increase taxes it is often the next Congress and Whitehouse that live through the results. The same is true of the opposite. The positive effects of a tax decrees often take effect in subsequent administrations. By then it is too long for the perpetrators, or even the reason for the booming economy or recession to be linked to the results by the common observer. And so we go on in this senseless cycle.

By the way, even with all of the tax cuts of recent years we are only down to paying approximately the historical average tax rates for our country. We had to take significant cuts to get down to the average. If we go up to these higher rates that are being proposed we will be far above our historical average. That cannot help but take a toll. We will never be able to continue as an economic leader in the world with a 64% tax rate. No nation ever has.

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.

Your Next Step

Budgeting is not restrictive. You won’t be spending less, you’ll be spending right. So what do you have to lose? Except all that debt and stress?