Wednesday, October 29, 2008

Is Raising Taxes on the Rich really Bad?

There is a lot of focus on raising taxes on the rich, corporations, and small-businesses and giving tax cuts to the middle-class. Do these really matter?

Think about this:

If I raise taxes on a big corporation like Target what will they do? First, they’ll increase the cost of the goods they sell by a little more than that amount. You and I will pay more for everything we purchase and probably buy a bit less. Since they’ll sell less they’ll also lay off a few people, not very many, but a few. The layoffs and price increases will hardly be noticeable.

If I raise taxes on those who make over $150k or $200k, or $250k what happens? Realistically the companies they work for will, over time, increase their salary by enough to make up the difference. In order to attract someone to do a more difficult job the relative increase in their take-home must make it worthwhile for them. This increase will also find it’s way in to the cost of the products they sell and yep, you guessed it, you and I will pay more, buy less, company will lay off a few people, etc.

If I then give the middle class a tax cut what happens? Will the companies they work for give them lower wage increases over the next few years? Relative to those who’ve had their tax burden increase, you betcha. Even without the lesser wage increases will that tax cut be enough to make up for the increased cost of goods because of the higher prices from the tax increases above?

Guess what, this is kind of a zero sum game. How you spread the tax burden has little real impact on individual’s daily lives. A free economy will eventually work it out so everyone maintains about the same relative spending power.

The key is that phrase Tax Burden. The more money that is taken out of the economy by government for government programs, the worse off everyone is. It’s not really born more by the rich or by big bad corporations or by the middle-class. It’s born by everyone. Every single dollar of additional government spending negatively impacts each and every single person who earns their own way in this world.

Any focus on how the burden is spread is nothing but a smoke screen. It only hides increases in government spending. “Hey middle-class, we’re going to take $200 less from you and instead take $400 more from those terrible corporations and wealthy folk and then use that extra $200 for government programs.” Sounds good doesn’t it? What nobody mentions is that the cost of goods will go up by $400 so the middle class is actually less well off by $200.

In the end, any increase in government spending impacts everyone. The person who makes $45k per year may take home $1k more but will also find that stuff they want to buy has increased by $3k so they actually have $2k less to spend. There goes that flat-screen TV or Disneyworld vacation. But hey, we got tax break and a government program in the trade!


The Pharisee said...

I'd say the rich, whatever percentage of the population they represent, pay no taxes by virtue of the fact that their high position on the scale causes them to pass every expense downward.

Monkeying with the tax burden distribution does have the effect of chasing of the wealthy to places on the planet where it is easier to hide that wealth so the annoying task of fending off attempts to take it, are, less annoying.

It also makes it harder to pole vault from the ranks of the middle class, to the ranks of the well off or the wealthy.

Crusty said...

You're absolutely correct about higher taxes causing high worth folks to run to tax shelters. Good point.

How does it make it harder to jump from the middle class?

The Pharisee said...


My personal experience comes into play here. I have noted that while willing to work hard, I have to work vastly harder to make an extra thousand after taxes than I do to make the first three thousand, after taxes.

If my money is not hidden in ways acceptable to the government, merely being frugal doesn't do it. I fall into the higher tax bracket quicker than you can say Obama, and don't keep my extra earnings in good times, when I could be saving to get my own business.

Government wants me to save for retirement, wants me to save in the form of a mortgage, but won't allow me to merely spend less, earn more, and keep it so that I can buy something I want. Like a business.