Why It Is Still Stupid To Overtax the Rich

The annual tug of war is upon us again. the Democrats want to tax the rich even more and the Republicans do not. In this case, the battleground is whether or not the Bush tax cuts should be allowed to expire or they should be continued for all people or just those earning less than under $250,000 a year. Obama wants to move the highest tax bracket to 39% for those earning over $250,000 a year, four points higher than the current 35%.


One of the problems with this year's argument is that it is just before a midterm election cycle and the political class is out posturing again, trying to use the issue to gather votes and divide the country, rather than do the right thing for the economy and American families. Below are some random thoughts on why raising the tax on the rich is not a good thing to do in the midst of a lousy economy and high unemployment:

• By Obama's own calculations and mine, which were published in a previous post, raising the highest tax rate on the so-called rich would generate an additional $70 billion or so annually for the Federal government. This is $70 billion that cannot be spent on cars, restaurants, vacations, iPads, and other economic growth activities. To put this number in perspective, the Obama administration in its first three years is likely to run about a $1.4 TRILLION deficit in each year. Thus, if the Federal government got their hands on this $70 billion, and it was used for deficit reduction, the annual reduction in just the budget deficit would be about 5%. Thus, the argument the Democrats put out that the rich need to do their share of reducing the deficit is bogus. The amount that would be gathered is about only 5% and it is doubtful that even this measly amount would be used to reduce the deficit, it would likely find its way into more wasteful government growth spending.
• Obama likes to blow up the number and give a ten year figure for more impact, citing a 10 year revenue gain by the government as $700 billion. However, the current trajectory of government spending will add about another $10 TRILLION to the national debt unless drastic action is taken soon. Thus, even with the ten year view, this amount of increase taxes would be only about 7%. And this estimate assumes that the economy gets very healthy, very soon. If not, deficit spending will get higher, the national debt will get higher, and this number will be even smaller. The national debt is not a tax revenue problem, it is a massive out of control spending problem by the political class.
• Consider a real life example of a long time friend of mine. He established and for more than thirty years has worked tremendously hard to build up his successful brokerage and insurance business. He probably works over 60 hours a week and I do not know the last time he took a real vacation. I begrudge him nothing because his success was done the old fashioned way, hard work and innovation. He earns over $250,000 a year and would be affected by these tax increases. He foresaw this coming right after Obama took office and made some family financial decisions. Since his only diversion from work is his boat, he wanted to protect that part of his life. Thus, his family decided that as a result of not keeping as much money from the government and political class, he would lay off his long term housekeeper and he and his wife would no longer go out to dinner every Wednesday night. Imagine that these types of trade off decisions are being made by thousands of Americans across the country and you start to see why unemployment is staying so high.
• Forbes magazine recently released its latest list of the richest 400 Americans. If you add up the net worth of these 400 people, their net worth, not their income, you come out to about $1.4 TRILLION. If the government was theoretically able to confiscate the TOTAL WEALTH of these 400 Americans, it might be able to pay off the Federal deficit from just one year's worth of Obama's spending. Unfortunately, you could only do this once since the richest 400 would be among the poorest after this type of heist next year. It's a silly analogy but effective: even if you stole the wealth of the richest, you could not come close to paying off the national debt that this political class continues to inflict on us and our children. To say that these tax cuts are critical to reducing our debt is ludicrous.
• Since the poorest people on the Forbes list were worth about a billion dollars each, even if you confiscated the wealth of the next 400, the government's take would be considerably less than $400 billion, not even close to covering the deficit spending that the Obama administration has embarked on.
• Mark Zuckerberg, the founder of Facebook, today announced he was donating $100 million of his personal wealth to help the Newark, New Jersey school system. He would not have been able to make that donation if the government confiscated his wealth. Combine this with the billions of dollars that Warren Buffet, Bill Gates, and the Sam Walton family have contributed to great causes and try to imagine what would happen to those causes if the government had taken all of their wealth. Again, strictly a theoretical example but one that illustrates that wealthy people do a lot of good in this country. They help improve our pitiful public school systems, they contribute to causes to wipe out disease, they hire housekeepers, they dine out in restaurants, etc. And the political class would probably be happy, especially the Democrats, if rich people were wiped out.

Why Obama has the compulsion to stick it to the rich is beyond me. Perhaps it is because he never really had a real job in the private sector. Perhaps because it is just another crude political ploy to "energize his base," the good of the economy and the rights of Americans to keep what they earn be damned. The only good news is that if he continues with these types of tax policies, combined with his massive failures in the economic stimulus area, he will indeed become a one term, Jimmy Carter-like caricature of a President because he will not turn around the economy, reduce unemployment, and reduce the national debt with his current approaches.


Now, if you think that the rich do not pay enough in taxes, that is absolutely your right to think that way. But please, do not tell me it is their patriotic duty to give the political class more money, it is not. Please, do not tell me we need this money to balance the budget and reduce our national debt, it will have minimal effect. And please, do not tell me that they did not earn their wealth, the great majority of them did, and the great majority of them on that Forbes list made our lives better in the process. To think otherwise, is just pettiness and jealously on your part.



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