Taxing The Rich, Taxing The Wealthy, Implications of Taxing The Wealthy, Implications of Taxing The Rich, Economics of Taxation.
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ZingerKing is Published on Monday, Wednesday and Friday of each week from September through June. In July and August ZingerKing will publish on the summer schedule of once a week.
______________________________________________________
July 1, 2009
Weekly Article
Summer Schedule
Today’s Zinger:
The Avoidance Of Taxes Is The Only Intellectual Pursuit That Carries Any Reward John Maynard Keynes
Morning Briefing:
Taxing the rich. It seems that every time the Obama administration and Congress is asked how they plan to pay for something (health care reform, pay down the debt, enhanced social programs, expanded government services, etc.) the response is “those earning $250,000 or more can shoulder a greater tax burden”. With a tax system that already garners 40% of all revenue from 1% (the top tax payers), how much more can be expected of this group before they decide to move to the mountains and retire to a golf community and leave the taxing situation they are in?
With the latest Congressional Budget Office Report issued June 30, 2009 (click and will open in new window) indicating the interest expense on the federal deficit (using blue chip estimates) will result in an additional $4 trillion in interest payments in the next ten years,beyond what was originally indicated by the Obama administration, we can count on the government searching for every possible taxing opportunity.
Today’s ZingerKing looks at the best selling book, Atlas Shrugs, the Laffer Curve and Economist Joel Slemrod's compilations on the economic consequences of taxing the rich (Does Atlas Shrug?). Clearly, there is a difference in people that were born lucky, those that got lucky and those that made their own luck in becoming wealthy, and there are differences in how these groups respond to increased taxes.
The Discussion:
There is a long-standing position in the Republican Party, going back to Ronald Reagan, that taxing the rich creates a disincentive to the very people that take risks, hire employees, grow businesses and therefore contribute the most to our economic growth. According to the Tax Foundation, the top 20% of those that earn income and pay capital gains in the United States pay 80% of all taxes. The top 1% pay 40% of all taxes. Here is link to the Tax Foundation - It will open in a new window.
Based on this, it is a very few people that create wealth and pay the burden of taxes. Many believe that if these people feel that their risks and efforts are no longer worth the income they will realize after paying taxes, they will reduce their efforts or quit working and ultimately cause a shrinking of the economy. So, the question becomes how far can we tax these people before it impacts prosperity in the economy?
The Laffer Curve is used to illustrate the concept that government can maximize tax revenue by setting tax rates at an optimum point. Taxing below this point will under tax, taxing above this point will create added incentive and result in lower taxes. The curve was popularized by Arthur Laffer, although the underlying principle was known since the time of economist John Maynard Keynes. Here is a link to the information source on the Laffer Curve. The reason that lower tax rates generate higher tax revenues is that labor sees greater benefit in working more and there is less desire to hide income in the shadow economy or transferring wealth to tax shelters.
Reducing tax rates will always stimulate the economy. However, if tax rates are too low the government fails to realize the full potential tax revenue. If the government spends more than they take in (deficit spending), the government forgoes needed revenue by under taxing.
Ronald Reagan significantly reduced taxes to stimulate the economy. George W.Bush did the same. Republicans hang on to this modern day example as evidence that reducing tax rates increases tax revenues. But as the Laffer Curve points out, this is only true if the tax rates are too high (above equilibrium) to begin with. This was true in the Reagan years, but this is not necessarily true in the Bush years. The top marginal tax rate at the time Reagan reduced taxes was 70% (point B). The top marginal tax rate at the time Bush reduced them was 40% (close to point A), therefore the impact of lower tax rates during the Bush years was significantly less than the Reagan years. Besides, Reagan raised taxes in his second term while Bush continued with lower tax rates. Under any circumstance, the government must match tax revenue with spending or be victim to deficits. Both Reagan and Bush talked as fiscal conservatives, but they were anything but. Under both Presidents, tax revenues increased but spending increased much faster, resulting in unprecedented deficit spending.
As President Obama looks to pay for health care, increased government involvement in various industries and activities, pay higher interest on the federal deficit (which will increase faster than all other government spending in the next few years) and the war in Afghanistan, the tax reductions on the wealthy that have occurred in the past 30 years seems to be a likely target for increases. But if President Obama increases these taxes, what can we expect from the wealthy?
Many of you remember the book Atlas Shrugged, written in the 1950’s by Ayn Rand. This compelling story looks at the consequences of big government run amuck. As a response to ever-increasing taxes and government intervention in the private lives of its citizens, the wealthy industrialists that have been so heavily taxed, use their wealth to get their ultimate revenge. These individuals chose to revolt against the government and taxes by no longer working their chosen field. This results in a reduction of tax revenues and forces the people that are so disgusted by prosperity and wealth to fend for themselves as they were no longer the benefactor of the industrialists labor and generosity.
Atlas Shrugged has been required reading in most college economic programs throughout the United States. Ayn Rand tells the story in an entertaining style. The book is filled with thought provoking consequences of a meddling government. Here is a link to the website for the book. You can purchase the book by clicking on this link to Amazon.com.
I recently read an analysis of the economic concepts found in Ayn Rand’s Atlas Shrugged, that is an in-depth look at the consequences of taxing the rich. Fascinating, if you are an economics junkie like myself, utterly mind numbing to everyone else.
One of the key concepts in this book is that taxing the rich does not have the consequences that may be expected. The book segments the rich into three groups. These groupings are my words, not the authors.
Raising taxes on the born lucky and got lucky has little impact on the economy since this group does not poses special skills that cannot be found in other people in the economy. It is the "made their own luck" group that has the greatest impact on the economy. This group is best demonstrated in the Laffer Curve, however,even this group does not change their level of effort due to tax increases according to Slemrod.
The real issue with taxing the rich is not that they may change their level of effort or reduce their investment. The real danger of taxing the wealthy is how they perceive the tax and how they revolt. Wealthy respond differently based on their perception of the tax. If they feel the tax is too high or unjust they shelter the income, transfer it to offshore investments, time the realization to minimize tax, take greater risks in preparing taxes, etc. It is this response to higher taxes that reduces the government's revenue.
The Conclusion:
President Obama needs to be careful how he deals with the wealthy. Up to this time the administration has been treated as a group that does not pay their fair share, are self centered on their own indulgences and it has been implied that they are the reason for insufficient government revenue to cover spending. The wealthy will find ways to avoid taxes if they perceive the tax is unfair or the government is unjust. They will not be amused at President Obama's rhetoric about the wealthy and taxes and the wealthy will exercise their own form of revenge.
If our government is unwilling to take the dramatic step to implement the "Fair Tax" that would eliminate most tax shelters, income timing, investment transfers and tax evasion that accompanies higher taxes on the wealthy, then they should at least impose taxes based on economic benefit, not economic punishment. Encouraging productivity, risk taking and wealth creation will power up our economy for those that make their own luck.
Zinger
Have you Zinged someone lately? Please forward a link to a friend, family member or neighbor.
ZingerKing is Published on Monday, Wednesday and Friday of each week from September through June. In July and August ZingerKing will publish on the summer schedule of once a week.
______________________________________________________
July 1, 2009
Weekly Article
Summer Schedule
Today’s Zinger:
The Avoidance Of Taxes Is The Only Intellectual Pursuit That Carries Any Reward John Maynard Keynes
Morning Briefing:
Taxing the rich. It seems that every time the Obama administration and Congress is asked how they plan to pay for something (health care reform, pay down the debt, enhanced social programs, expanded government services, etc.) the response is “those earning $250,000 or more can shoulder a greater tax burden”. With a tax system that already garners 40% of all revenue from 1% (the top tax payers), how much more can be expected of this group before they decide to move to the mountains and retire to a golf community and leave the taxing situation they are in?
With the latest Congressional Budget Office Report issued June 30, 2009 (click and will open in new window) indicating the interest expense on the federal deficit (using blue chip estimates) will result in an additional $4 trillion in interest payments in the next ten years,beyond what was originally indicated by the Obama administration, we can count on the government searching for every possible taxing opportunity.
Today’s ZingerKing looks at the best selling book, Atlas Shrugs, the Laffer Curve and Economist Joel Slemrod's compilations on the economic consequences of taxing the rich (Does Atlas Shrug?). Clearly, there is a difference in people that were born lucky, those that got lucky and those that made their own luck in becoming wealthy, and there are differences in how these groups respond to increased taxes.
The Discussion:
There is a long-standing position in the Republican Party, going back to Ronald Reagan, that taxing the rich creates a disincentive to the very people that take risks, hire employees, grow businesses and therefore contribute the most to our economic growth. According to the Tax Foundation, the top 20% of those that earn income and pay capital gains in the United States pay 80% of all taxes. The top 1% pay 40% of all taxes. Here is link to the Tax Foundation - It will open in a new window.
Based on this, it is a very few people that create wealth and pay the burden of taxes. Many believe that if these people feel that their risks and efforts are no longer worth the income they will realize after paying taxes, they will reduce their efforts or quit working and ultimately cause a shrinking of the economy. So, the question becomes how far can we tax these people before it impacts prosperity in the economy?
The Laffer Curve is used to illustrate the concept that government can maximize tax revenue by setting tax rates at an optimum point. Taxing below this point will under tax, taxing above this point will create added incentive and result in lower taxes. The curve was popularized by Arthur Laffer, although the underlying principle was known since the time of economist John Maynard Keynes. Here is a link to the information source on the Laffer Curve. The reason that lower tax rates generate higher tax revenues is that labor sees greater benefit in working more and there is less desire to hide income in the shadow economy or transferring wealth to tax shelters.
Reducing tax rates will always stimulate the economy. However, if tax rates are too low the government fails to realize the full potential tax revenue. If the government spends more than they take in (deficit spending), the government forgoes needed revenue by under taxing.
Ronald Reagan significantly reduced taxes to stimulate the economy. George W.Bush did the same. Republicans hang on to this modern day example as evidence that reducing tax rates increases tax revenues. But as the Laffer Curve points out, this is only true if the tax rates are too high (above equilibrium) to begin with. This was true in the Reagan years, but this is not necessarily true in the Bush years. The top marginal tax rate at the time Reagan reduced taxes was 70% (point B). The top marginal tax rate at the time Bush reduced them was 40% (close to point A), therefore the impact of lower tax rates during the Bush years was significantly less than the Reagan years. Besides, Reagan raised taxes in his second term while Bush continued with lower tax rates. Under any circumstance, the government must match tax revenue with spending or be victim to deficits. Both Reagan and Bush talked as fiscal conservatives, but they were anything but. Under both Presidents, tax revenues increased but spending increased much faster, resulting in unprecedented deficit spending.
As President Obama looks to pay for health care, increased government involvement in various industries and activities, pay higher interest on the federal deficit (which will increase faster than all other government spending in the next few years) and the war in Afghanistan, the tax reductions on the wealthy that have occurred in the past 30 years seems to be a likely target for increases. But if President Obama increases these taxes, what can we expect from the wealthy?
Many of you remember the book Atlas Shrugged, written in the 1950’s by Ayn Rand. This compelling story looks at the consequences of big government run amuck. As a response to ever-increasing taxes and government intervention in the private lives of its citizens, the wealthy industrialists that have been so heavily taxed, use their wealth to get their ultimate revenge. These individuals chose to revolt against the government and taxes by no longer working their chosen field. This results in a reduction of tax revenues and forces the people that are so disgusted by prosperity and wealth to fend for themselves as they were no longer the benefactor of the industrialists labor and generosity.
Atlas Shrugged has been required reading in most college economic programs throughout the United States. Ayn Rand tells the story in an entertaining style. The book is filled with thought provoking consequences of a meddling government. Here is a link to the website for the book. You can purchase the book by clicking on this link to Amazon.com.
I recently read an analysis of the economic concepts found in Ayn Rand’s Atlas Shrugged, that is an in-depth look at the consequences of taxing the rich. Fascinating, if you are an economics junkie like myself, utterly mind numbing to everyone else.
One of the key concepts in this book is that taxing the rich does not have the consequences that may be expected. The book segments the rich into three groups. These groupings are my words, not the authors.
- Born Lucky: Those that have inherited their wealth. This is almost 50% of total wealth. Here is a link.
- Got Lucky: Those that rode a wave of good fortune in the marketplace. This is 37% of the wealthy according to a survey by PNC Wealth Management.
- Made their own luck: Those that built successful businesses. This is only 13% based on the above estimates.
Raising taxes on the born lucky and got lucky has little impact on the economy since this group does not poses special skills that cannot be found in other people in the economy. It is the "made their own luck" group that has the greatest impact on the economy. This group is best demonstrated in the Laffer Curve, however,even this group does not change their level of effort due to tax increases according to Slemrod.
The real issue with taxing the rich is not that they may change their level of effort or reduce their investment. The real danger of taxing the wealthy is how they perceive the tax and how they revolt. Wealthy respond differently based on their perception of the tax. If they feel the tax is too high or unjust they shelter the income, transfer it to offshore investments, time the realization to minimize tax, take greater risks in preparing taxes, etc. It is this response to higher taxes that reduces the government's revenue.
The Conclusion:
President Obama needs to be careful how he deals with the wealthy. Up to this time the administration has been treated as a group that does not pay their fair share, are self centered on their own indulgences and it has been implied that they are the reason for insufficient government revenue to cover spending. The wealthy will find ways to avoid taxes if they perceive the tax is unfair or the government is unjust. They will not be amused at President Obama's rhetoric about the wealthy and taxes and the wealthy will exercise their own form of revenge.
If our government is unwilling to take the dramatic step to implement the "Fair Tax" that would eliminate most tax shelters, income timing, investment transfers and tax evasion that accompanies higher taxes on the wealthy, then they should at least impose taxes based on economic benefit, not economic punishment. Encouraging productivity, risk taking and wealth creation will power up our economy for those that make their own luck.
Zinger
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I have recently read "Atlas Shrugged". The book has so many parallels to what is going on today. It is a must read.
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