Problems with Taxing the Rich

The Rich are Different

March 11, 2008

Whenever the subject of government revenue shortfalls (i.e. deficits) comes up, politicians and their allies on the left immediately begin demanding that the needed funds be raised by increasing taxes on the rich. There is never any thought or talk about solving our economic problems by cutting government spending.

Targeting the rich has its advantages from a political standpoint. After all, the rich are a minority of the population, so ambitious politicians can afford to lose their votes and still win. Second, throughout history, the stoking of feelings of class envy and class hatred have always been a good tactic for ambitious politicians to use to gain their ends.

Envy and class warfare were central to Marxist politics and the history of the twentieth century is soaked with the blood of the victims of that politically directed hatred.

Rich Have More Assets Than Other People

However, there are a few problems with trying to satisfy the unlimited spending desires of the politicians running Washington by simply taxing the rich. These are in addition to the fact that no matter how much money Congress manages to extract from the American taxpayer it will never be enough to satisfy their addiction to spending money.

According to Internal Revenue Service (IRS) data for the year 2005, the top 1% of tax payers, which one would assume includes the richest of the rich, provided 39.38% of total income taxes paid that year.

Expanding this to include the top 10% of taxpayers we find that this larger group paid 70.30% of that year's taxes. While one can debate whether or not this share of total taxes paid by the rich is fair, it is defiantly a large share of the taxes paid. And,while the rich may be able to afford more, they do not have unlimited income which means that there is a limit to the amount that can be collected from them. Robin Hood style fiscal policy has its limits.

Further, the old cliche about the rich being different is true when it comes to income. What distinguishes the rich from the rest of us is not so much the fact that they have high incomes (most do, but many are also like the Federal Government where their debts exceed their incomes no matter how much they earn) but by the fact that they have more assets or wealth than the rest of us.

Income Tax Applies to Income, Not Wealth

However, the income tax taxes income, not wealth. So a wealthy person with no income would not pay any income tax. The fact that wealthy people have past savings from which they can support themselves means that they can reduce their tax burden by simply reducing their income, a strategy that is generally not available to the rest of us.

The rich also have other options that can reduce income for income tax purposes which the rest of us don't have as well as being able to afford to hire armies of accountants and tax lawyers (the cost of which is deductible from income for tax purposes) to find more ways for them to reduce their tax burden.

While most middle and lower income individuals receive income in cash and need that cash to pay their living expenses, wealthy people can afford to take income in other forms such as stock options, equity or other non-cash forms.

Stock options and other equity type investments are taxed eventually, but that does not happen until the option is exercised or equity sold that the proceeds become taxable. Having this choice not only allows the wealthy person to avoid paying taxes on these things now but also enables them to choose when to cash in and incur the tax. That can be a time when taxes are lower or their other income is lower, both of which will result in their having to pay less taxes.

To Raise Needed Funds, President Clinton's Tax on Rich Started With Incomes of $33,000 Per Year

As a result, in order to raise the funds needed with a tax on the rich the definition of rich has to be stretched to include a large chunk of the middle class. Empirical evidence to support this statement comes from the soak the rich tax that Bill Clinton promised in his 1996 campaign.

During the campaign Clinton and his supporters promised that a tax on the rich would be sufficient to fund their ambitious spending programs. Of course candidate Clinton and his supporters never bothered to define what they meant by rich.

However, during the Vice Presidential debate that year, then Vice President Dan Quayle argued that the tax would have to hit incomes as low as $35,000 in order to generate the desired revenues. His opponent, Senator Al Gore, scoffed at this as did his supporters in the left wing media.

When Clinton and Gore won and got the Democratic controlled Congress to enact the tax they were able to prove the former Vice President wrong - sort of. The tax actually applied to people with annual incomes starting at $33,000 and above rather than stopping at $35,000 as then Vice President Quayle had claimed.

Taxes on Rich Usually Hurt the Poor and Middle Class

Even when taxes are carefully crafted to only include the real rich, there can be a nasty surprise for the middle class and the nation as happened with the Carter Administration's tax on yachts.

After whipping up the publics' emotions with their usual class warfare rhetoric (remember candidate Carter's campaign against the so-called three martini lunch deduction?) President Carter and his Democrat controlled Congress enacted a stiff tax on the purchase of yachts.

Given that only the super rich can afford a yacht, this should have been the ideal tax on the rich. But the Carter Administration overlooked two things.

First, the rich, like everyone else, hate to waste money.

Second, and more important, while only the rich buy yachts, it is middle class workers who build yachts.

As a result of the tax, most rich people did one of two things in that they either made do with last year's yacht or purchased a new one abroad where the tax did not apply.

In doing so, the small American yacht industry was destroyed (one New Jersey town whose economy was totally dependent on yacht building faced economic disaster) and associated jobs and income tax revenues (unemployed people generally pay little or no income tax) were lost.

This little episode only served to further weaken the nation's economy which, as a result of the misguided Keynesian taxing and spending policies of the Nixon and Carter administrations, was struggling under the dual burden of double digit inflation AND double digit unemployment.

The yacht tax fiasco, which even if it had been successful, was never projected to generate significant revenue. It was instead, driven more by a desire to punish the rich for their success than to raise revenue.

However, the yacht tax is a clear demonstration of the truth of former President Regan's observation that Washington doesn't solve our problems, it IS the problem.

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Comments 14 comments

Chuck profile image

Chuck 2 years ago from Tucson, Arizona Author

Sanctuary - I strongly recommend against opening a secret off shore account as the IRS has pressured most foreign nations and their banks into disclosing earnings on these accounts including ones that are supposed to be secret accounts. While off shore accounts are legal, American citizens and resident aliens are required to report and pay taxes on this income. Failure to do so is a crime that can result in fines and/or prison.

As to corporations, all corporations operating in the United States are required to pay taxes on their net profits earned in the United States. Money earned by a corporation's overseas subsidiaries are subject to taxes on their profits by the nation or nations in which the subsidiary operates. However, the money is not subject to U.S. taxes on profits unless that money is brought back to the United States.

Because the United States has the highest or one of the highest corporate tax rates in the world, U.S. companies are not eager to bring their foreign earnings back to the U.S. and many foreign companies are reluctant to invest in operations in the U.S. (which, among other things would create more jobs here).

As for individuals, all American citizens and legal residents are required by law to report and pay taxes on everything they earn anywhere in the world (the U.S. is about the only nation that taxes the world wide income of its citizens). Further, the bulk of individual taxes are paid by the highest earning five or ten percent of the population with the rest being paid by the middle class. Most of the poor that you refer to fall into the close to 50% of the U.S. income earning population that pay no Federal income taxes due to the fact that their adjusted income is below the minimum required to pay taxes.

While the working poor may have Federal income taxes withheld from their weekly paychecks they get all of the funds withheld back at tax time when they file their income taxes. In fact many not only receive all of their federal tax money withheld back at tax time but also receive additional funds, known as the earned income credit, which means that these people not only pay no Federal Income taxes but actually receive a tax refund that is greater than the income withheld from their paychecks during the year.


Sanctuary 2 years ago

I think I will worry about this when you pay taxes. Just get yourself an off shore account or pay off a politician and you should be ok. Have you ever really looked at what the top 100 companies pay in taxes. It is suppose to be 30 percent a terrible requirement but none of them pay even 10 percent. They have not even paid close to anything in decades and they wonder why we are broke. The tax burden is on the poor and there is no hope in hell that they are even going to make interest payments. These Corporations have not even paid enough for half the roads that get to their parking lots. How could the Government sell all public utilities to privatization and have years of GDP and still be bankrupt? Its easy when those with the most money our not paying taxes. You have to be really blind to ignore this truth. At a certain point things have nothing to do with politics and this one is all about money and not politics.


Entourage_007 profile image

Entourage_007 4 years ago from Santa Barbara, CA

I have never thought about that before, if your rich with no income, there is very little income tax. Great article.


wba108@yahoo.com profile image

wba108@yahoo.com 5 years ago from upstate, NY

Chuck- This is pure politics, no matter what rate the upper income groups are taxed, they pay around 20% of thier income. Its just plain dumb to increase taxes on the wealth producers unless your gaining political points for class warfare! And of course your right that taxing income, is hurting those who are trying to become wealthy and not the wealthy themselves; those hypocritical rich liberals!- Regards and blessings WBA


Barry Yarkoni 5 years ago

Amazing how history repeats itself. Obama wants to hammer corporate jets. Last time I checked, rich people did not build corporate jets.


DonDWest profile image

DonDWest 5 years ago from Halifax, Nova Scotia, Canada

You also forgot to mention that many poor people who cannot afford to purchase a house, instead opt for living accomodations on a yacht. I know one guy who pretty much spent his entire life living at sea.


Chuck profile image

Chuck 6 years ago from Tucson, Arizona Author

Jon Ewall - good point. These taxes targeted toward the so called rich always fail to produce significant revenue.

The fact is, the tax proposals and legislation that Democrats push is not intended to raise revenue but, rather are attempts to make political points by attempting to stir up jealousy and envy in society. Class warfare has become a favorite tool of the party.

They are obviously aware of the fact that such taxes don't work as far as raising revenue since all they have to do is look at themselves and their reactions to tax hikes. As I pointed out in my Hub ( http://hubpages.com/politics/Senator-John-Kerrys-Y... ) about Senator John Kerry - the very liberal and very wealthy Senator from Massachusetts - who traveled half-way around the world to New Zealand to save a few dollars on his new yacht thanks to lower tax rates in that nation and then decided to dock the yacht in neighboring Rhode Island which levied a lower tax rate on yacht docking.

Thanks again for your comments.


JON EWALL profile image

JON EWALL 6 years ago from usa

lapak2000

Sometime ago in the past, Congress imposed a luxury tax on high priced

commodities with a desire to tax the rich who were buying automobiles, yachts, jewelry and other luxury items. Result of that legislation was a lost of thousands of jobs and some companies going out of business. Are we facing a similar situation today?

Today under the leadership of the majority Democrat Congress and President Barak Obama the recession continues and unemployment has risen from 4.6% in 2007 to 9.8% in Dec.2010. In 2009 the deficit was $1.3 trillion, 2010 it was $1.2 trillion and projected to be $1.1+ trillion in 2011. As of Dec. 3 the 2011 budget has not been debated or approved in Congress.


lapak2000 profile image

lapak2000 6 years ago from Cebu, Philippines

It is the same problem with other countries. The Rich are evading the tax that the government is asking.


JON EWALL profile image

JON EWALL 6 years ago from usa

HUBBERS

A NEWS FLASH!

Obama and some Democrats are now considering extending the Bush tax cuts to revive the economy. The Republicans suggested extending the tax cuts and a holiday on the unemployment taxes months ago. OBAMA AND THE DEMOCRATS have spent $811 billion on pork and the unions. The private sector union jobs apparently lost out, unemployment went to 9.6% from 9.5%.The Healthcare Reform bill isn't doing what it was suppose to do, lower healthcare cost. Senator Wyden of Oregon wants out of portions of the Healthcare Reform bill. Many of the Democrats running in the November election don’t want to discuss Healthcare Reform, reason being that many did not read or debate the bill before they voted for the bill.

The chickens are coming home to roost as someone once said. You can fool some of the people some of the time but you can’t fool all the people all of the time.


JON EWALL profile image

JON EWALL 6 years ago from usa

Chuck

A repeat of history, the Democrats still haven't got it right. Pelosi said '' by extending unemployment benefits '', we are helping spur the economy.The Democrats and President Barak Obama don't understand that the people want JOBS, not a government handout first.


Joni Douglas profile image

Joni Douglas 6 years ago

Facts enlighten. Thanks for the facts, Chuck.


Underwater man 7 years ago

Great job i agree with your comments.I've been on another blog with a person known as egalefeather who is a liberal, and I was showing him this class envy thing. His opnion is that we are all brain dead becuase we don't buy into this tax policy. I asked him when was the last time he got a job from a poor person? He could not give an answer only call me and Texan brain dead. Well I'm glad to see all of the other conserative out there. We will just have to keep giving them facts then they might pull there heads out.


Jondolar profile image

Jondolar 8 years ago from Tacoma, WA

Hi Chuck,

Good job! I became a PCO of my neighborhood to hopefully elect a person of integrity and with a clean record that would at least start turning this "ship" around, but with what we've got left to vote for now, I think it's hit the iceberg. Now the real question is, how many life boats are there and who's going to get on one before it's too late.

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