The present presidential campaign keeps bringing up the question of whether the rich are paying their fair share of the taxes in this country. In New Smyrna the view appears mixed. For example, when I asked lawyer Judson Wood this question, he replied, “They are probably paying too much.” Bill Daniels, 70, answered, ”The rich should have to pay a higher marginal rate.” Amanda Lee Fike at Ruthie’s Restaurant responded, “I don’t think they pay enough; they get away with a lot.”
The point I would like to explain in this blog is that the wrong question is being asked. The better question would be: How can we get the rich and successful to make the greatest contribution to the well-being of the American people?
In this respect, both sides of the political spectrum are somewhat on the same page. The problem is with the methods to be used to get the successful people to contribute the most to our economy.
In the presidential race, Democrat Barack Obama wants to go after anyone who makes in excess of $250,000 as part of his so-called economic stimulus package while giving tax breaks to those who make less -- even with the unofficial recession and the ever-worsening housing and banking crises. Republican John McCain wants less taxes being brought into government, which he rightfully believes will stimulate job growth because the small business owners will be encouraged to invest heir money as they are already paying enough.
Looking at tax revenue numbers released by the treasury, it appears that the rich are already contributing quite heavily to the tax revenues. The top 5 percent of earners pay about 58 percent of the income taxes collected. The top 10 percent of earners pay about 71 percent of the income taxes while the bottom 50 percent pay about 3 percent of the taxes.
However, there are some who would like to force the people at the top to “contribute” even more. Believe it or not, I agree with these people as far as the results desired, but not the methods proposed.
The point is that the rich “contribute” more to our treasury and to our economy when the marginal tax rates are made low -- not high.
When confronted with the treasury numbers the high marginal tax rate supporters still argue that somehow it isn’t fair and more barriers should be placed in the path of the successful people.
The next question that needs to be asked is: Who is really hurt when we try to punish the rich with high tax rates?
I would argue that it is the lower income classes who are hurt the worst when the rich are being “punished” with higher taxes.
One illustrative example of this occurred when it was decided that people rich enough to buy yachts should pay an extra luxury tax on those yachts. This produced dramatic results. Many of the rich delayed buying their next yacht and made do with their old yacht. Meanwhile many of the working people who made the yachts got laid off and had to find another job.
Which group suffered the most when the rich yacht owners were “punished?"
I maintain that similar things happen in other parts of the economy when the successful and prosperous are being “punished.”
As we speak, one party maintains that capital gains tax rates and dividend tax rates should be raised because those “evil people” who save and invest their money should not be given such juicy breaks. This is bad reasoning for several reasons.
First, those "evil investors" make up the majority of the American population. If you own stocks directly or are in a mutual fund or company 401k plan or even a pension plan you are an “evil investor.”
Second, when you start to punish investing with higher tax rates you get much less investing. Less investing means fewer jobs and opportunities, slower growth and a weaker American economy.
It should be noted that one class of investment that is particularly hard hit by high capital gains tax rates is venture capital for high-tech start ups. One historical example of this occurred when the capital gains tax rate went from 20 percent to 28 percent in the 1980s. The venture capital for high-tech start ups virtually dried up. One source estimated that the amount of available venture capital for high-tech start ups decreased by more than 10-1.
It goes without saying that high tech start ups are crucial to our economy.
We should ask the question who will be hurt the most if investments are curtailed, the investor or the worker? The investor may be made angry but the workers will be without jobs.
The investor will take his money and put it in a “safe place” until conditions improve for investment.
The problem with this behavior is that putting money in a safe place isn’t the best thing to grow the economy. For instance buying municipal bonds so cities and states can build more buildings is not good economics.
The third argument against raising taxes on investment is that the treasury is reaping more tax money at the lower 15 percent tax rates on investment income than they did previously at the higher rates.
While we have concentrated on taxes on investment it should also be realized that higher marginal rates on ordinary income have not produced much if any increase in revenues. People find more ways to hide their income or worse yet quit working.
I stubbornly assert that the way to wring the most out of our successful and rich citizens is to remove the barriers to their success. This applies to all of our citizens not just the rich.
The removal of barriers to success starts with lower tax rates and then extends to fewer regulations, fewer barriers to foreign trade, sound money and legal protection of property rights.
Removing the barriers to success is by far the best way to go. Promoting class warfare is not good for anyone no matter who they are.