Categorized | Economic Crisis, Featured

Taxing the Rich Doesn’t Work

Notorious libertarian Peter Schiff rants about the hypocrisy of Warren Buffet’s comments about the reasoning for raising the tax on the rich. Warren Buffet continuously misleads people into believing that he is paying a lower tax rate than his secretary. However, this is true only in terms of his personal income tax, as Warren Buffet receives the majority of his income through a dividend from his company, Berkshire Hathaway (dividends and capital gains are now subject to a maximum of tax of 23.8%, thanks to the new fiscal cliff deal and “Obamacare”). His secretary, assuming she gets paid at least $35,350 pays a marginal rate of 28% income tax.

What he fails to mention is that he is paying business tax as well. Berkshire Hathaway pays billions of dollars in taxes every year; since Buffet owns a third of the company, he is also paying one third of the taxes.  (Corporate income tax is 35%). He chooses not to pay himself a salary, preferring instead to receive a dividend. If Buffett truly wanted to pay more in taxes, he could just pay himself a larger salary, which it would subject to a higher tax rate in personal income (top income tax bracket on ordinary income is now 39.6%).

What about carried interest, which serious hedge/income fund managers use as a tax loop-hole to get away with paying less tax through the current rate for dividend and capital gains. Four years ago, Obama promised that he would end the carried interest tax loop-hole. Would he now really end this, considering that the majority of his political contributors are in this category? It is doubtful.

Tax the rich? But who are the rich?

Lawyers, doctors, engineers, and other professionals…. these are the rich people in this context. But should these people be the target for higher tax increases? When rants go off about the “rich,” are people truly thinking about their family doctor, or rather the millionaires and billionaires? Taxing the rich means more taxes being paid by people who earn money through ordinary income (wages, commissions, tips, salary, etc.). When president Obama says “let’s tax the rich,” and you hear the crowd roar in the background, they don’t understand that it is they who are most likely going to be targeted. According to Business Insider, the top 1% make more than $350,000 a year and the top 5% make more than $150,000 a year. The bottom 50% of people make less than $50,000 a year. Your take-home income after taxes even for these top income earners is not enormous in today’s standards.

You see, the real rich people–the ones you are probably thinking about, like Warren Buffett–are the 0.1%. These people make millions or even billions a year. Most of these individuals get paid little to nothing via ordinary income. They get paid mostly through capital gains and dividends. To increase their tax rate, you need to increase the dividend and capital gains taxes. However, there will always be some tax loophole that they can figure out to minimize paying their taxes. And you don’t want to do that, because then they will simply send even more money overseas.

If you really want to tax the rich, you gotta…..

Decrease taxes!

Yes,  it sounds counterproductive–but hear me out.

When you decrease taxes, you increase entrepreneurship, especially if regulations are eased as well. You create an incentive for people to start businesses and since there will be more businesses, it will increase the choice of supply of products and create more competition in probably every given market. THE REAL RICH HATE COMPETITION! It means that they will have to work harder to earn their money since they now have to compete against smaller businesses.

Increasing taxes seems like the right thing to do for the misinformed, but what really happens is that “the too big too fail” businesses get bigger and the smaller businesses get wiped out (as pointed out here). The end result from higher taxes: people like Warren Buffet and other successful businessmen profit from it, while hurting the very people (bottom 50%) who need it the most. Taxing the rich doesn’t work.

If you don’t agree, challenge it below.

References

http://www.sfgate.com/politics/joegarofoli/article/Wealthy-who-avoided-the-fiscal-cliff-4188343.php

http://en.wikipedia.org/wiki/Ordinary_income

http://www.businessinsider.com/who-pays-taxes-2012-8?op=1


  • Syrin

    History has shown this to be true over and over and over again. When Coolidge, Kennedy, Reagan, Bush, Sweden Norway, Ireland, India, etc LOWERED taxes, tax revenue went UP ! It’s a damn mathematical formula at this point, but might as well be string theory for liberals.

    • economicreason

      I agree. Lower taxes does increase tax revenues! A simple formula that could actually increase gov revenue and increase entrepreneurship, thus providing the much needed jobs

  • AWickedDude

    Foolish Follower’s! The market doesn’t mean Sh$t!

    Our
    spoils are a direct derivative of Technological Ability and
    Resources/Energy……… nothing else, nothing more; the market just
    decides who gets what and why.

    7
    Billion and counting and you think that there is enough to sustain a
    proper competition platform to ensure prosperity for us all. You think,
    in an advanced society that people will tolerate a large Wealth Gap!?

    Taxation
    ensures that wealth is distributed properly, so that people can service
    their debt. This debt is needed because some idiot elected for an
    infinite debt system in a finite world; save your efforts and tie the
    debt mechanism back into a commodity, to regulate the economy. Most
    people get a few cars, a home and periodic vacations. I most certainly
    will not tolerate a few taking all the resources/energy because they
    “believe’ they work hard. We need to measure this “Effort” and properly
    determine a reasonable pay scale! Plus people still have base needs and
    must be invested in to ensure proper competition!!!

    The
    majority of Technological Discoveries were made by individuals that did
    not financially benefit from them, at all! We Humans have foolishly
    crippled our only Spaceship (Earth) in this Infinite, hostile blanket of
    space.

    Just
    like with skewed Communism, our skewed Capitalism, has improperly
    managed “Earth’s” Resources and Human Effort. In an Advanced Society,
    wealth gaps diminish, not increase. We are regressing as a Race and the
    clock is ticking on Fossil Fuels… act accordingly Gentlemen.

    Blowing
    Smoke up the Wealthy Elites butt, might buy you temporary prosperity!
    But long term prosperity involves us all and must be managed correctly.

    Drop the charade, begin to support one another, Increase our Yields and take care of your ONLY HOME… EARTH. Good Luck!

  • http://twitter.com/PowerofWords22 Loren Robinson

    Good Article. I agree because the reason why raising taxes on the wealthy does not work is because truly wealthy people accumulate most of their wealth through assets. So billionaires like Buffett have over 90% of their wealth in assets and investements that are taxed at a very low rate. Buffett knows that the tax on income is high so increasing taxes on wealthy will just lead them to lowering their salary and shifting that money to assets and investments.

    • economicreason

      Thanks!

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