Tuesday, November 30, 2004

Taxing the rich

I was wondering why people talk about taxing the rich but we never end up taxing the very rich heavily at all. Taxing the rich ends up, at best, meaning taxing the upper middle class. It finally occurred to me, it is vitually impossible to finance any government activity by taxing the very rich. And this is very easy to demonstrate.

Take the very rich to be the Bill Gates, George Soros, Teresa Heinz Kerry, Tiger Woods class of rich people.

-Recognize that the government needs real resources to build aircraft carriers, provide food or housing for the poor, improve homeland security or whatever it wants to do.

-To provide those real resources, taxes must reduce someone's consumption of real resources. Someone's behavior has to change or there are no real resources taken in taxes for the government to use.

-The very rich don't need to change their behavior in response to any reasonable taxes. Bill Gates does not say, "Gee, that tax bill was high this year, I won't do fiber optic to every room in the house, I'll just use wireless in the west wing". It doesn't happen. Teresa Kerry does not say, "Wow, that was quite a tax bite, I'll buy off the rack this year instead having designers come in." Doesn't happen. Even if they shift their assets in response to taxes, they won't change their own consumption. They have sufficient resources they can afford to ignore any reasonable taxes.

-The very rich can't be taxed at an unreasonably high level because they have the political resources to defend themselves. If you try to take 7 or 8 billion from Bill Gates he's going to notice, spend a couple million or even a couple of hundred million, and he is going to win. Though even 7 or 8 billion wouldn't affect his actual consumption.

-So, taxing the very rich only changes consumption or (actually impacts) those less rich folks who depend on how the very rich allocate their assets to avoid or to pay taxes. These folks may be anywhere in the income distribution.

So, forget trying to finance the government on the backs of the very rich.

Now consider:
-who has sufficient resources to finance significant government activities
-who's consumption is sensitive enough to income that it can be reduced by taxes
-who doesn't have unlimited ability to buy political influence to fight unreasonable taxes
That's right, the upper middle class and the middle class.

-People who own prosperous autoshops, boutiques, hair salons
-Executives at corporations (excluding the highest paid ones who are super rich)
-Real estate investors and successful agents
-Highly paid skilled workers

These upper middle class people are the people who should be pictured when someone talks about taxing the rich, not the super rich. The famous star entrepreneurs, athletes, heiresses are not affected in the least by higher taxes.

People in the super rich class who advocate higher tax policies are routinely given credit for opposing "their own" interests. This is false credit. When George Soros advocates higher taxes, he is opposing the interests of people much poorer than himself. His consumption will not be reduced at all by any tax increase advocated by him or the organizations he funds.

Think of the right rich people when you are thinking of taxing the "rich".


Ralph said...

My Mom reads the blog but didn't know how to post a comment. Here is her comment from e-mail. I'll answer in another post:

I read with interest Ralph's theories about not being able to tax the rich. How does that jibe with the State of California's plan to tax those reporting over 1 million a year on their income tax to finance care of the mentally ill? I haven't heard anything else about that Proposition since it passed in the November election. Am I remembering that Proposition correctly? I think the key word is "reporting". Is one million a year income the Proposition's definition of the "very rich"?

I understand the theory about limited resources and that someone needs to not use a resource for it to be available for someone else to use it, but wouldn't the government still be happy to get one or two million from Bill Gates even if it doesn't cut his consumption?

Ralph said...

Two questions in the above post:

(1) What about the California tax only on incomes over 1 million?

(2) Isn't the government just happy to get Bill Gates millions in tax dollars even if it doesn't reduce his consumption?

(1) Does the California tax on reported incomes over 1 million hit the "rich". Not the super rich for the reasons mentioned in the post. The tax may be hitting a lot of people who are getting a one time large hit of income (e.g., large stock gain on options, small business sale, professional athlete with a short career) who aren't as rich as 1 million a year would seem to imply.

More importantly the tax will hit people with incomes below 1 million through secondary affects and changes in behavior to avoid the tax. I believe this tax is small so the secondary effects will be spread out enough to be invisible, but they are real. People with incomes below 1 million should not think they are getting these programs for "free" or that the Barbara Streisands and Larry Ellisons of the state are the ones picking up the tab. People with incomes below 1 million are paying and people with incomes above 1 million but less than the super rich are paying for the programs.

(2) Isn't the government happy to get millions from Bill Gates taxes. Sure they are. But the question is who's consumption is reduced to make way for those millions in government spending; who is really paying. It's not Bill Gates, it will be people poorer than Bill Gates whether they are beneficiary's of his foundation or the non-employees of companies that he would have invested in if he had those millions.