“High tax rates that many people avoid paying do not necessarily bring in as much revenue to the government as lower tax rates that more people are in fact paying, when these lower tax rates make it safe to invest their money where they can get a higher rate of return in the economy than they get from tax-exempt securities.” – Trickle Down Theory and Tax Cuts for The Rich
“Just two cents, two cents” droned Elizabeth Warren as she campaigned for an ultra-millionaire tax during her failed run for President in 2020. Warren, who had complained incessantly over the years about “millionaires and billionaires”, suddenly dropped her disdain for millionaires when she became one herself, several times over. Nonetheless, she is back to stick it to the most envied people in America, by proposing a 2 to 6 percent additional tax on net worth over 50 million, in the hope of pocketing up to 4 trillion dollars for the government coffers. Net worth is not one’s annual income, it is a person’s total assets including cash, homes, yachts, art, jewelry, and more, which has already been taxed once. Warren justifies her plan as a means of reducing growing income inequality with an intent to rebuild the middle class.
But what about the middle class? The idea that the middle class is disappearing is a longstanding myth. Based on a Pew Research Report from 2018, 52 percent of Americans are in the middle class, with the middle class defined as annualized household income that is two-thirds to double the national median. The same report also showed that 19 percent of American households were upper class, while just 29 percent were at the bottom. Globally, based on a 2018 report from the Brookings Institute, we have now reached the turning point where more people are living in the middle to upper class, than those living in the lower class and poverty. Ironically, even as inequality increased, the condition of the poor and middle class has vastly improved.
Warren's error is the belief that money held by rich capitalists is money stolen from the workers. But it is the worker who is paid first, at a wage they agreed to; while investors must wait for a profit if there is ever any profit at all. It is the entrepreneur who develops a product by putting scarce resources to their best use. Warren’s wealth tax is a barrier to entrepreneurship which in turn is a barrier to more economic development, more opportunities, and more jobs.
Over the past few decades, dozens of European countries had various forms of wealth taxes. Today, however, only a few remain. Most taxes not only failed to produce the vast increases in revenue that they promised, but many also saw other revenue sources dry up, due primarily to changes in behavior caused by the wealth tax itself. In fact, increasing the tax rates does not automatically result in increased tax revenues. The Laffer Curve, a creation of Economist Arthur Laffer, suggests there is a point at which increases in tax rates will no longer bring in more revenue but instead, force a change in behavior and result in less revenue.
So, is it true that the rich do not pay their fair share? A headline in a 2018 Bloomberg article noted: “Top 3 percent of US taxpayers paid majority of income tax in 2016”. The story goes on to reveal that the richest 1,409 taxpayers paid more in federal income taxes than the bottom 70 million combined. Seems to me that they pay plenty. Furthermore, 2018 tax data also indicates that the top one percent paid 37.3 percent of collected taxes while the bottom 90 percent only contributed 30.5 percent of the total collected taxes. Again, fair share?
In Thomas Sowell’s 2012 13-page book, “Trickle Down Theory and Tax Cuts for the Rich”, Sowell exposes the trickle-down argument as a ruse concocted by the critics of supply-side economics, which favored low taxes. Trickle-down has, in fact, become a dog whistle, a triggering word, tied to tax cuts for the rich. This myth continues to be used to this day as a false argument, to prevent real debate about the advantages of low taxes. Sowell goes on to remind us of the Democrat Party heroes who themselves championed lower taxes, including President Wilson, Economist John Maynard Keynes, and President Kennedy.
There are indeed different philosophies in tax rates. The people who call for tax cuts are looking to increase revenue by freeing up more money for productive use for new enterprises, leading to increased economic activity resulting in more jobs and higher pay. Those who attempt to increase taxes on the wealthy are not looking to change the amount of economic activity, they are merely looking for a way to redirect money from rich to poor.
The biggest source of revenue for the federal government comes from federal income taxes. Since 2009, federal income tax revenue has increased every year regardless of which political party was in power. While federal income tax receipts have grown over 70 percent since 2009, the US population has only grown by 8 percent over the same period. This means, that in 2009, the federal government brought in $6,845 per person; in 2021, that amount was $11,673. And despite these increases, the government incurs more debt and deficits. How can anyone claim that the government is not receiving enough revenue? The problem is clear, they are vastly overspending.
Rich people are not generally stupid people. When their income and wealth are threatened, they change their behavior. And they have a lot of options to minimize their tax liabilities including deductions, exemptions, tax shelters, and much, much more. Globalization has also opened up the rest of the world to potential investment possibilities. If one country becomes hostile to business, those businesses will uproot themselves and move. We have seen this time and time again.
The capital of the wealthy is critical to our financial system. It does not sit dormant in cardboard boxes underneath their beds. It is used by entrepreneurs and businesses alike, to grow and create more and better services and products. High tax rates remove that money from a thriving economy and hand it over to politicians who have little or no knowledge of business itself.
Most people have become wealthy from hard work, and innovation, and thus by benefiting society. They should be admired and not envied.
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