“Tax Cuts for the Rich”

That’s the term the Left and the media use. Even conservative media people and some Republicans use it. It’s wrong.

It’s not the rich. It’s people who want to be rich. It’s people with high incomes. It’s people running small businesses as LLCs and Sub-S corps that get funneled into the same tax category with people making high salaries. These people are working like hell to use their limited capital as efficiently as possible, to get the highest possible return. The successful high-earners among them are some of the most creative and productive people in our society. They create the jobs. The best of their small companies eventually become large companies and create tremendous wealth for their founders, shareholders, employees, contractors, suppliers and customers — all of us.

The higher we set the rates at which we tax these highly productive people on their incomes and capital gains, the lower will be the returns they earn on their capital and therefore the less they will invest. The less they invest, the less they will create. The less they create, the less wealth there will be for all of us. Scrooge McDuck, sitting on piles of idle money, isn’t affected by high income- or cap-gains tax rates. Nor is he creating much by keeping his money idle. But a guy who has most of his net worth tied up in a successful business has a lot to lose and will be trying to earn the highest possible return on his capital and effort. Make him a target, reduce his returns by singling out high earners for tax-rate increases, and he will invest less and work less, and therefore will create less and hire less.

We should be encouraging such people, not looting their capital to buy votes.

UPDATE: Robert Schwartz adds many good points in the comments.

12 thoughts on ““Tax Cuts for the Rich””

  1. Several reasons why the whole discussion makes me nuts:

    First, the idea that extending the tax rates that have been in effect for the past eight years amounts to a tax cut is not even wrong. It is utterly misleading. The correct way to talk about it is whether or not Congress is going to allow a massive tax increase.

    Second, the idea that the current rate chart was a “tax cut for the wealthy” when it was put in effect is wrong. The rate charts in Section 1 of the IRC are only one step in the determination of the amount of the check that will be written to the Federal Government. Other calculations, deductions, exemptions, and credits are are also important. For myself, I never had my taxes decrease because of the 2001 changes in the Section 1 rate charts, because I have been paying the alternative minimum tax throughout the entire period.

    Further, it is beyond dispute that the net effect of the tax changes in 2001 and 2003 was to increase the portion of income and total taxes paid by the upper income brackets. Collections dropped in the aftermath of the 2001 cuts, but that was mostly due to due the effect of the collapse of the internet bubble on capital gains.

    Numbers are here: http://www.cbo.gov/publications/collections/taxdistribution.cfm

    Third, the numbers that are thrown around like “it will cost $680 billion to extend the Bush tax cuts” are ludicrous. I acknowledge that under CBO’s methodology it looks like the Government would collect $680 billion more if it raised rates, but what would happen if they sent out invitations to a party and nobody came.

    The methodology assumes that the people do not change their behavior because of tax law changes. That is of course nonsense. Furthermore the CBO assumes that the economy will soon resume its historic growth patterns, even in the face of a whopping rate increase. Double nonsense. The IRS won’t collect taxes on interest earned next year, because market rates have gone through the floor. I think my last money market statement showed a rate of 0.01%. Nor will capital gains taxes be paid, investors will still be offsetting losses from 2008 and 2009.

    Bottom line is that if nothing is done to stop the rate chart from changing on January 1, the economy is going down for another eight count. Even the higher rates will not increase the revenue from a sick economy.

    Fourth, this type of language: “[W]here would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans …” is offensive. Tax revenues are not the Government’s money, they are the property of the people who earned them, even if they are passive investors who simply failed to waste the earnings. In the dream lands of the academic left, property may be a gift from the state, and what any of us gets to spend may be only by its grace. But the United States was explicitly created by its citizens (We, the people), and that money is ours. The $680 billion wouldn’t go anywhere, it would stay in the pockets of its owners. Of course if it never comes into being … see 3rd above.

    Fifth, Jonathan is correct. The incentive effects of a rate hike at the highest level is the only one that counts. No entrepreneur tries to increase his income from $50,000 to $75,000 a year. He wants to get into the highest bracket. The incentive effects are there. If raising revenue were the only issue, it would be better to raise the lower brackets, not the highest one.

  2. An important distinction, indeed. “The rich” calls to mind lazy aristocrats and caricatures of cartoon robber barons (Scrooge McDuck). The already-rich are in best position to avoid any tax scheme. The only true tax on “the rich” is a wealth tax.

    A related distinction never made is the difference between gross and net income. If somebody operates a partnership with a handful of employees, their gross will almost certainly be above whatever threshold is being discussed. These “rich” are not taking home $250,000/year, they’re selling $250K. Taxes come off the bottom line, not the top.

  3. Scrooge McDuck, sitting on piles of idle money

    Idle money? Given this thread is about sharpening language, it is worthwhile to point out that there is literally no such thing as idle money. (And we’re not talking about the velocity of money, or the size of the money supply, or anything like that.)

    Generating wealth is not a blind, automatic process. There are plenty of businesses that go bankrupt, just as we all know of millionaire athletes who have lost it all from irrational decision-making. We only stay rich in a capitalist society by doing something someone else wants us to do. A person generating and/or maintaining wealth is either providing a good or service that someone else wants, or is making investments that lead to goods or services that others want. No one hordes piles of cash.

    Our error is thinking of the economy as a pie that can be redistributed. Distribution is precisely the problem of socialism, not capitalism. For nothing is distributed in capitalism; everything is exchanged. There are no buyers without sellers. All taxes, like subsidies, create a deadweight loss– they prevent transactions from occurring that otherwise would have taken place. That’s why they harm economic well-being.

  4. My old tax professor told us that, whenever we (law students) see a businessman doing something that doesn’t seem to make sense, it’s probably about taxes.

    Likewise when we see politicians doing something that doesn’t seem to make sense, it’s probably about fund-raising.

    Here the whole point of politicians raising tax rates on the rich is NOT to increase tax revenue, but to increase the politicians’ cash flow in the form of campaign contributions in exchange for tax breaks.

    I.e., nominal tax rates on the rich will be raised so Congress can then sell them tax breaks. Actual tax revenue will go down.

  5. Here we see a major deficiency, perhaps the major deficiency, of the tea parties.

    I once saw an illustration of differing attitudes between Britain and the United States. A British worker sees a fatcat going by in a big limousine, and says, “Ah, we’ll soon have you out of that.” An American worker sees a fatcat going by in a big limousine, and says, “Someday I’ll have one of those.”

    There are now a substantial and growing number of Americans who have moved from the second group into the first. The reasons for that move are both various and irrelevant at this point. Unless some effort is made to educate Americans and get them back into the constructive attitude rather than the destructive one, no amount of political education will do more than slap fresh paint on a rotting structure.


  6. Probably in an ideal world we would extend the “tax cuts on the rich” (please note the use of irony-quotes) and let the tax cuts on the “middle class” expire. It had been noted in a “static analysis”, that the “tax cuts on the rich” will cost, dunno, 700 billion over the next 10 years whereas the “middle class” tax cuts will cost 4 trillion — someone can correct me if I have this right.

    Thus, if you passed tax cuts for the rich, the hit on revenues would be small, but there is a possible gain in terms of incentives for wealth creation. If you let the middle class tax cuts lapse, there would be howls of pain and perhaps a hit on consumer spending, but you would raise much more revenue and probably not have as adverse an affect on wealth creation. You would also “flatten” the tax structure in the bargain as well.

    The President’s proposal of extending the tax cuts for everyone-but-the-rich is the worst of both worlds — huge hit on revenue, huge hit on wealth creation. Something in me would like to see this go through, just to see this happen and to be able to gloat, “How’s the President’s economic plan working for you?”, but too many people are in a world of economic hurt to wish for this.

    Or maybe not. I telephoned by ultra-left-liberal Representative Tammy Baldwin (D-WI) that I “supported the President’s campaign pledge to extend the tax cuts for everyone, except for the wealthiest Americans, who need to pay their fair share” (I am like the Russian-speaking AWACS operator on the Tom Clancy novel, who almost busted a kidney from not laughing, pulling the chain of a Russian fighter pilot who failed in an attempt to sneak up). This week I got a kind of mush-mouthed letter (dated August 20? Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?) thanking me for my support of President Obama’s plan, blah, blah.

    If these guys are going to do anything on taxes, they are going to have to get off their backsides and get to work. If they follow Speaker Pelosi’s plan and just let the tax cuts expire, a whole bunch of middle-class people will feel it immediately in Jan 2011 with increased withholding. Thanks for the pay cut, Nancy! If they do act on extending tax cuts to “the middle class”, a lot of things can happen in Ways and Means Committee, and they may end up extending crucial tax cuts (for the stock market) on stock dividends and the like. If they really keep to the President’s plan on not extending tax cuts “to the rich”, we will run this little experiment on how long the current economic crisis will continue, now, won’t we.

    Look people, this thing is a win-win however you look at it.

    Yeah, we are going to keep the car keys away from the one’s who put it in the ditch, and we are going to rock that sucker out of that ditch and end up over a cliff . . .

  7. Some of the rhetoric in Congress has “the rich” coming in as long as $150,000/ year. Famous Vietnam fighter pilot Tom Harkin says that is too much money.

    “Two hundred and fifty thousand dollars? Is that the top 1 percent of Americans, or half a percent? Come on!” said Sen. Tom Harkin (D-Iowa).

    Harkin said he would be willing to extend the tax cuts for families earning $150,000 or less annually.

    Pretty soon, he will be extending tax cuts only for those who don’t pay income taxes.

  8. Paul – “Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?”

    Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.

    Too bad she beat John Shaprless all those years ago, I honestly don’t see any end in sight for her reign over this area. Sigh.

  9. Repealing the 1990 Luxury Tax on Yachts

    The US in 1990 carried out a tax-raising experiment, applying luxury taxes to the first sale of expensive cars, private airplanes, and yachts.

    The tax on yachts was “only” 10% of the sale over $100,000. As it happened, boat building was concentrated in Maine, and decreased demand cost 200,000 jobs in boat building of all types. Buyers switched to buy their boats in Europe. The revenue increase was tiny, and clearly this was a tax only on the rich.

    Bush the senior arranged to repeal those taxes in 1993.

    The significance here is that the damage from this specific tax was clearly visible, in a concentrated industry within a few states. The tax was repealed because there was no confusion about its obvious and unintended effects, and there was organized opposition which affected a few key senators.

    The Obama tax increases on the rich will have similar effects. Unfortunately, those effects will be diffuse among many types of luxury goods, and much larger. People will be unemployed without knowing why, and recovery will be slowed or stopped.

  10. “Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.”

    Yes, but the Dems haven’t made up their mind on this. One one hand you have Speaker Pelosi who just wants the tax cuts to expire to tap into the revenue stream, and on the other hand, you have the inconvenient truth that Candidate Obama made extending at least some of the tax cuts a campaign pledge, and recently President Obama gave his voice to reminding us all of where he stands.

    So which is, “let those Bush tax cuts expire” or “For . . . those . . . of . . . you . . . making . . . less . . . than . . . (fill in the blank 250K/200K/150K — there has been some squish on that) . . . you . . . will . . . not . . . see . . . your . . . taxes . . . go . . . up . . . one . . . dime!” I am thinking there is a break between the President and the Dems in Congress on this one, otherwise they would have acted months and months ago and perhaps spared the economy all of the agony of the uncertainty this creates.

    Yes, Rep. Baldwin is in lock-step with the Dem leadership, but I don’t think these people know whether they want to even make good on Mr. Obama’s promise or not. I thought it was clever politics to call Rep. Baldwin and demand that she get to work shoring up the President’s promise on this one.

    See, once tax legislation comes up on the agenda, the “rich” are going to take a haircut, yes, to hold up the anti-rich talk, but the opportunities for sausage-making then present themselves to not wreck the economy by simply letting the tax cuts lapse. If the Dems keep tax cut legislation off the calender, there is no way to cut any deals, and the Dems own the consequence of the big burp in tax rates in the middle of an economic crisis. Oh, that dastardly George W. Bush!

  11. We should be encouraging such people, not looting their capital to buy votes.

    I thought that was SOP around some parts, like, er, Chicagoland?

    – Madhu

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