Friday, September 16, 2011

Why is taxing the rich a bad idea?

Thomas Sowell over at National Review wrote an excellent post on September 15, 2011explaining why it is a bad idea to tax the rich in his article, "You Can't Tax the Rich?"  Actually, you can tax the rich, he writes, it's simply a bad idea.

Why?  Because the rich have access to ways of hiding their money so it cannot be taxed that small business owners do not.  If you're the CEO of a million dollar company, you have the ability to put your money in tax free bonds or, better yet, you can transfer that money to a different country. In this way, even if the top marginal tax rate is 73 percent as it was in 1921, the rich will not be paying 73 percent.  In fact, Sowell writes:
The number of people with taxable incomes of $300,000 a year or more — equivalent to far more than $1 million in today’s money — declined from over 1,000 people in 1916 to fewer than 300 in 1921. Were the rich all going broke?
It might look that way. More than four-fifths of the total taxable income earned by people making $300,000 a year and up vanished into thin air. So did the tax revenues that the government hoped to collect with high tax rates on the top incomes.
Secretary of the Treasury Andrew Mellon wanted one of two things to happen to remedy this situation back in 1921:  1) Cut the loopholes or 2) cut the top marginal tax rate. Yet Congress wasn't willing to do either one for the same reason many politicians still use to this day: "We don't want to cut taxes on the rich."

Sowell explains that high taxes don't really effect the rich because they can hide their money in ways the common small business owner can't.  Your local restaurant owner, your gas station owner,your car lot owner, your retail store owner or your factory owner won't have access to loop holes.

And since these small businesses provide for about 70 percent of all jobs, it's the common folks like you and me who will be the most severely hit by high taxes, not the rich.  Unable to pay all the taxes, small business owners will lay people off or close their businesses.

 People like you and me will be out of work.This causes the unemployment to go up.  Even fear that taxes will go up can cause layoffs, as is what happened when people feared the Bush tax cuts might expire.  So, in this way, tax rates greatly effect the economy.  Tax rates greatly effect unemployment rates.

Ultimately Mellon and Calvin Coolidge managed to get income taxes cut, and the result was that income to the government nearly doubled between 1920 and 1928.  The same thing happened when John F. Kennedy cut taxes in the early 1960s, Ronald Reagan in the early 1980s, and George W.Bush in the early 2000s.

In this way we have proven once again that tax cuts cause the rich to stop hiding their money, and in return they spend more. This spending triggers the economy to grow, and small business owners benefit as a result.

These small business owners hire more workers and expand their businesses to keep up with the growing economy, and the end result is that we all benefit.  Unemployment goes down, and revenue to the government increases.  Even though people are paying less in taxes, there are more taxpayers. It's common sense folks

So by Sowell's argument, one I hold onto dearly, taxing the rich is not a good idea.  If you want to raise more money for the government, the way to do it is not to raise taxes -- it's best to lower taxes.

1 comment:

Glenn said...

sweet. now i understand. thank you :)