Should Taxes Be Increased on the Wealthy?
Overview/BackgroundAs of this writing, the U.S. federal debt is close to $14 trillion. The annual spending is around $3.7 trillion as is set to go even higher as Medicare and Social Security costs rise, in addition to Obamacare set to kick in around 2014. All this despite the fact the U.S. government only takes in around $2.2 trillion per year. It's a system that is headed for disaster on par with Greece or worse. Few would argue that federal spending needs to be cut, although which programs & departments to be cut is highly controversial. Raising revenue would help to alleviate the problem. Many believe that taxes should be raised on the wealthy, given the top 1 percent own between 30 and 40 percent of the total wealth. Such thinking is part of the foundation of such protests as the Occupy Wall Street movement started in 2011. Others would argue that the rich already are bearing the lion share burden of taxes , as the top 1 percent of earners pay about 38 percent of total federal income taxes; the top 10 percent of earners pay about 70 percent of total tax revenues; the top 50 percent of earners pay about 98 percent of total tax revenues; while 48 percent of Americans pay zero federal income tax. Some even take advantage of refundable tax credits such as the Earned Income Credit to get tax refunds even though they paid in $0. Regardless of who is right on fairness, let's examine the reasons why taxes should and shouldn't be increased.
Revenue for defense, education, health care, social security, and so many other needs must come from somewhere.
With a national debt fast approaching $15 trillion, spending cuts alone are not going to solve the problem. America has too many needs. We live in a dangerous
world and provide the main counterbalance of power of Iran, North Korea, China, Syria, and other threats to freedom. With an aging population, it will
be tough to cut rising social security and Medicare costs. Soon interest on the national debt and non-discretionary spending will exceed tax revenues, so
something has to be done.
The rich already have enough money to live a great lifestyle; it won't hurt them as much to increase their taxes.
With people all over the country struggling to pay for food, rent, gas, medical care, and other necessities, is it really too much to ask to
have millionaires and billionaires pay a little more? When your toughest financial decisions are such ones as, "Should I put off buying another
vacation home until next year?", or "Should I buy a private jet or continue to fly first class?"
The skyrocketing national debt, compounded with the unsustainable federal deficits, have the potential to topple the U.S. and world economy
if more isn't done soon.
When the debt-laden economy of Greece finally reaching a breaking point, it dramatically cascade throughout Europe and the world, and that economy is
miniscule compared to other European countries. Greece was able to be saved by bailouts & forgiven loans. In the case of a monster-sized
economy like that in the U.S., there is no fallback. If the U.S. economy collapses because of its debt burden, so does every other economy in
the world. Both spending cuts and new tax revenues will likely be necessary to brink the budget back into balance.
Government can use taxes as a means of redistributing wealth to the poor and less fortunate.
Although many rich people are charitable, for many others, that is not the case. They spend money on luxuries they don't need, or worse, try to
spend their lives getting even richer. By taking the wealth from such rich individuals, government can create programs to help the needy such
as food stamps, unemployment, free health care, etc. while also enhancing programs that help individuals climb the economic ladder, such as
educational assistance and job training.
The power of rich individuals such as Bill Gates, Warren Buffett, and George Soros, must be contained by limiting their wealth.
Power inevitably comes with wealth. Money can hire individuals to do almost any activity, both legal and illegal. George Soros has shown how
wealth can enhance power by funding influential political outlets like MoveOn.org and funding media outlets such as MSNBC. Rich individuals
can influence the outcome of various political campaigns, which prompts politicians to curry favor from them. Wealthy individuals can donate
money to colleges, scholarship programs, charities, and private business programs--all with conditions as to how the money is spent, which is
yet another way of flexing their power & control. Rich individuals can buy or sell large quantities of stocks or bonds, manipulating prices and
creating the ability to exercise control over the management of companies. With all this power, they can create market conditions and a
certain predictability that makes it easier to accumulate even more wealth. Taxing such individuals is one of the few ways that government
can limit the growth of such power & wealth.
Since the rich always alter their spending, investment, work, and tax behaviors in response to rate increases, the amount of revenue brought in to
the federal government can actually decrease, which is explained by the economic principle known as the
It seems intuitive that tax revenues would increase as you raise revenues; however, the higher the rates get, the more likely taxpayers will alter their behavior
and the more likely the economy will suffer, resulting in a smaller tax base. In other words, tax revenue = taxable income * tax rate. If the tax rate
goes up but the taxable income goes down, than the total net revenues
will stay the same or even decrease.
Tax increases usually have a negative effect on the economy, since consumers have far less money to spend and invest; slowing the economy consequently
decreases revenue (since incomes are smaller) and increases spending (due to increased entitlement spending on unemployment, welfare, etc.).
Every tax dollar paid to the government is taken out of the private sector, which means less money is available for consumer spending and private
investment. This leads to a slow down of economic activity. Even President Obama, who heavily advocates higher taxes on the rich, has said that
you don't raise taxes in a recession due to the negative economic effect.
As we've seen recently with the Alternative Minimum Tax, inflation eventually brings incomes up to the point that the middle class is hit by taxes
originally targeted for "the rich".
The first income taxes put in after the 16th Amendment to the Constitution included a single bracket of only 1 percent, targeted at $20,000 income, which only the "rich"
at that time could attain. As government expanded, the need for more tax revenue arose, so taxes on these rich people rose. Scheming politicians knew
however, that inflation would eventually bring the vast majority of the nation into these tax brackets, so they purposely left out an index to inflation. That
original 1 percent tax has morphed into the most complex tax code in the world, with marginal federal rates as high as 70 percent in the early 1980s; they're
currently around 35 percent (not counting state, local, social security, and a
myriad of other taxes we pay). The Alternative Minimum Tax (AMT) was
another "loophole" closure, which forced the very rich to pay a minimum percentage no matter what their other deductions added up to. However, this is
yet another example of a tax that wasn't indexed for inflation, so in the near future, tens of millions of middle class individuals are destined to get
hit with the shock of this alternate tax. Politically, when politicians want to raise taxes, they use one of three justifications: 1) There's a crisis, such
as a war or depression; 2) it will only be temporary; or 3) This will only be on the rich. The reasonably thinking citizen should know that once these
taxes are instituted, they almost never go away, and they eventually hit everyone.
Taxing the rich does nothing more than shift money from the private sector, where it is usually invested and spent efficiently, to the government, where
it often ends up going to special interests or campaign contributors, or where it's inefficiently squandered in government bureaucracies.
Citizens of all wealth levels work hard for their money. Many richer individuals not only work hard, they sacrifice every day luxuries so they can save and invest
in order to achieve financial freedom and carry a large safety net of cash. Americans don't want to squander their hard-earned cash on useless investments or
consumer goods. When people are buying consumer goods such as smart phones, cars, houses, computers, etc., they evaluate different products, looking for the
best combinations of price and quality. Consequently, cash goes to the companies with the best quality & efficiency. On the investment side, individuals will
evaluate business plans, management, growth opportunities, risk, etc. to determine if the investment is worth making. Consequently, the new ventures most likely
to succeed are given the cash. On the government side of things however,
politicians are spending other people's money. The success or failure of the spending
doesn't matter to them as long as their campaign financers are happy and they can attain re-election. This is why you end up with such taxpayer-funded debacles
as the "Bridge to Nowhere" and Solyndra. The ironic part of government spending is that the failure to see results is usually used as a justification why
even more funds are needed for the failing program. For example, the "War on Poverty" was started by Lyndon Johnson in the 1960s. Despite the fact that poverty
continues to grow after 50 years, more entitlement spending is called for. The Department of Education has produced steadily decreasing testing scores, but
politicians consistently call for more spending there. The U.S. continues to grow its dependency on foreign energy sources, yet the Department of Energy continues
to grow their budget. The list goes on and on.
It provides less incentive for government to cut spending and reduce its size & intrusion into our lives.
As government spending grows, so does the number of individuals working in government, the number of enforcement/implementation agencies, the number of regulations,
and the number of limits on our freedom. Few will dispute that a myriad of federal programs and agencies such as the Department of Energy, the Department
of Commerce, Fannie Mae & Freddie Mac, the FDA, the EPA, etc. have slowly taken a way our freedoms and tacked on a ton of stifling regulation on businesses.
All would be likely candidates for cutting if politicians had to balance the budget with the current revenue levels. Taking more money from
the wealthy will take away incentive to cut these deadweight agencies, leading to a maintenance or steady increase in the size and intrusion of government
in our lives.
If marginal rates get too high, it might motivate some of the richer people to move to another country, taking with them all of their potential tax revenues.
In a technology dominated world, with smart phones, the web, satellite communication, etc., it's easy for people to move to a different country yet maintain
their contacts in the U.S. and experience American culture. If politicians continue to take more and more wealth from the rich, these individuals are simply going
to pack up and move to some other low-tax haven. Not only would American businesses lose the consumer and investment spending of such individuals, the government
would lose all it's tax revenue. The top 1 percent pay almost 40 percent of federal taxes. If a majority of them leave, the poor and middle class will
end up picking up the tab.
It's yet another way of dividing Americans; class warfare misdirects anger at the government and life circumstances by turning the lower & middle classes against the
rich, and the rich (who increasingly resent paying an increasingly greater share of the tax bill) against the poor and middle class.
The term "class warfare" is frequently tossed around by politicians. What does it actually mean? It starts with politicians such as President Obama and
communist-initiated protests such as the "Occupy Wall Street" movement. These leaders will rail against the excesses of the rich, firing up struggling
lower income individuals with envy of their luxuries and unnecessary wealth accumulation. The poor and middle class are taught to hate these rich individuals who
they don't feel are sharing enough of their good fortune. On the flip side, hard-working individuals who attain success feel they are singled out and punished
for their achievements. They see that 47 percent of Americans pay zero federal income tax, with the top 1 percent taking on 35-40% of the burden, yet the
same individuals who pay nothing and receive the most government benefits are the ones crying for more taxes on the rich. They see a lot of individuals who
don't want to work, yet expect handouts that middle-upper income individuals are paying for. Consequently, the upper class learns to hate the poor and lower
income citizens. Taken together, you have the vast majority of Americans fighting each other; thus, you have "Class Warfare". This doesn't bring people
together or solve problems; it simply helps politicians who engage in the class warfare get elected.
Lower taxes means higher potential profit, so individuals are more likely to invest and start new businesses.
New businesses bring competition, leading to more innovation and better products & services. New and small businesses are also by far the greatest
new jobs. Lower tax rates mean businesses have a greater potential for take-home profit and growth. Thus, more investment funds flow into business startup &
expansion. Plus, individuals are more likely to leave their jobs are start up new, successful businesses of their own.
Less money is given to private charities that are usually efficiently run, with more funds instead going to lobbyists, campaign contributors, and other
friends of politicians (i.e. "crony capitalism"). Even when money is directed to worthy causes, the federal bureaucracy incurs so much inefficiency and
fraud that only a fraction of it goes to the intended recipients.
Wealthy individuals such as Microsoft's Bill Gates donate tremendous amounts of money to charity every year. In fact, Gates and Warren Buffett have issued
a challenge to all billionaires to donate a certain percentage of their fortunes. Throughout American history, the most successful capitalists, such as
Andrew Carnegie and John Rockefeller, benefit the most charities. Look at any college for the name of various buildings or scholarship programs. They almost
always come from some wealthy individual that wanted to return the benefits of their successes back to the people. Rich people can only spend so much, so
as they near death, they look for ways to pass on their contributions. So they direct money to private institutions and charities they feel are efficiently
run and worthwhile. With private charities, much more of the benefit actually reaches the intended recipients. On the government side, however, politicians
are in charge of the money, with inefficiently run government offices distributing the funds. Consequently, when you tax rich people more, the extra money
only goes to campaign contributors and the waste machine that is the federal bureaucracy. Put yourself in the position of a billionaire. Say you had $1
billion that you wanted to give away. Would you want that to go to the U.S. government, or would you want to decide who receives it? Which do you
think would have the greatest benefit on society as a whole?
Related LinksWhy Do Increased Tax Rates Lower Revenues
List of 100 Taxes and Fees You Pay
Pros and Cons of Herman Cain's 999 Plan
Pros and Cons of a National Sales Tax (i.e. Fair Tax)
The Laffer Curve: Past, Present, and Future
Bar Stool Economics
Tax Policy Center
Do You Know What Taxes You're Paying?
Cato Institute: Tax & Budget Policy
Seven Compelling Reasons the Wealthy Should be Taxed More
If We Decided to Tax the Rich
Written by: Joe Messerli
Page Last Updated: 01/07/2012