In listening to Elizabeth Warren or Alexandria Ocasio-Cortez, it’s easy to say, “Tax rates on the rich are too low.” The obvious conclusion is rates should be higher and the government handing out money will solve all societal issues. I don’t know how many politicians actually believe this, but it is a political rallying cry.
Capitalism, with a set of fair-play rules, has allowed some people to become fabulously wealthy. Many more give the impression they are wealthy.
Additionally, given the “in-your-face” social media world we live in, it’s easy to become disenfranchised. Emotionally, many argue that some rich billionaire can easily afford to pay more taxes. Certainly, they can. If someone makes $10 million, they can pay a 70% tax rate and still have enough to pay their bills.
However, there are numerous unintended consequences that are far more difficult to absorb if our nation pursues that strategy.
My favorite question is my most sincere. Stop asking how this will affect rich people. There are far more poor and middle class people in our nation than mega-rich. Instead ask, “How does this affect the single mom raising three kids by herself?” That is the person who is most at-risk in our society. On average, she has a significant obligation relative to her take-home pay.
Understanding this, consider the implications of a “wealth tax” or a 70% income tax rate.
First, you assume the government will make financially prudent and efficient decisions with the new revenues. Their track record is less than stellar. I have higher hopes for financial responsibility out of my Siamese cat, Ninja. Instead, continue to promote entrepreneurship and frugality. Capitalism allows entrepreneurship to grow our economy, employ people, pay people and give them meaningful work.
Second, one assumes the U.S. is the only economy and the rest of the world does not exist. We live in a very global world in which capital is fluid. Wealth is no longer locked up in illiquid farms and land. Furthermore, it is not 1946 with the rest of the world in ruins after World War II.
Today, wealth is held electronically and can move with the click of a mouse. If tax rates are too high wealthy people can pick up their marbles and move to less punitive jurisdictions. If you don’t think this happens, consider all the people who left California and New York for places like Texas and Florida. If they can leave a state, they can leave the country.
Much to politician’s dismay, they do not control the rest of the world. The rest of the world will gladly accept as many millionaires and billionaires as possible. If this happens, how have you helped the single mom? You haven’t. But you reduced the amount of tax dollars and job producers.
Third, our tax code is written by less than expert people in Congress. Every time the tax-code is reworked it puts more burden on the single mom to figure it out. The single mom has the fewest resources to hire good CPA’s and attorneys.
Rich people, on the other hand, hire the very best accountants and attorneys to figure out how they can position assets most efficiently. Note: I did not say they will do anything illegal. Rather, when you create a tax code as complex as ours is, there is tremendous room for bright and creative minds to efficiently position assets.
Fourth, if wealthy people have punitive tax rates imposed upon them, they will create businesses and jobs in other countries. Or, they will implement robotics, outsource or identify other advancements that eliminate lower end jobs. Again, the single mom loses out.
Instead of trying to limit the amount of money people can make, our elected leaders should identify every possible way that MORE money can be made at all levels. Success should not be vilified. Hard-work, frugality and financial flexibility are qualities every American should aspire to. Instead of putting a cap on how much can be earned, lets emphasize helping those at the lower end gain more. We should all aspire to be productive millionaires.
To do so, we need training and education, not tax gimmicky, such that the single mom can get ahead. That allows the single mom to put food on the table and participate in the upside offered by a capitalist society.