Tuesday, July 22, 2008

Why Soaking the Rich is a Bad Idea

I am a pilot for a fractional jet company. My company supplies private jet shares to the rich and famous. The public perception is that these airplanes are toys that the rich buy so that they won’t have to rub shoulders with the masses. Liberals believe that the government should increase taxes on the rich, such as my company’s customers. The idea of taxing the rich is a tempting one, but in reality it is counter productive.

When taxes are increased on the rich, the rich obviously have less money to spend on items like shares of our corporate jets. Perhaps, they will put more of their money into tax shelters or foreign investments where tax laws are more favorable.

If a rich businessman doesn’t get to buy his jet, who is hurt? The most obvious answer is my company and its employees. If my company doesn’t sell a jet share, then the salesman does not get a commission, additional pilots are not hired, and jobs for support employees such as dispatchers, schedulers, maintenance coordinators, and administrative workers are not created.

Equally obvious is the loss to the aircraft manufacturer. Manufacturing jobs may be lost as aircraft orders dwindle. This also applies to subcontractors who work sheet metal, electricians who build avionics, craftsmen who work wood and leather for aircraft interiors, and the manufacturers of the thousands of parts that are assembled together to create a working airplane.

The damage does not stop there, however. The rich guy will not fly his jet around the country. When he does not visit local airports, local businesses called Fixed Base Operators (FBOs) don’t sell him fuel. Local businesses do not sell him catered food for his trips. Local aircraft mechanics miss out on the opportunity to work on the airplane. Local and state governments lose tax revenue from the lost fuel sales and airport fees.

Because the non-owner may never visit many places that he would otherwise see, other local businesses will also lose revenue. Cars will not be rented or hired, hotel rooms will not be rented, and restaurants will not be patronized. Tourism will suffer as museums and other tourist attractions are not visited.

Because many trips on private jets are business trips and not pleasure trips, investment in local businesses may suffer also, especially in areas not served by airlines. A deal that would be made in person may not be consummated over the telephone. Difficulty in obtaining outside investment may cause local businesses to stagnate and not create new jobs, causing small towns to go into further decline.

The jobs that are lost or are never created are not the end. As each person loses his job or cannot find a new one, their troubles spread to others. As one person runs out of money, his inability to pay his bills or buy new products affects other people and businesses down the line. Businesses are forced to write off bad debt that they could have collected from an employed person. Sales fall because unemployed workers have less money to spend, causing businesses to cut back and hire fewer workers.

Ironically, as the economy slows in the aftermath of tax increases, the government takes in less tax revenue. This is because the slowing economy is shrinking. Revenues for businesses and incomes for individuals are falling, so a tax, even at a higher percentage, yields a smaller total revenue.

The good news is that, as we learn from the past, the opposite is also true. If we reduce taxes, then the economy grows and businesses thrive. When business thrives, jobs are created and incomes rise. This, in turn, leads to higher tax revenues for the government in spite of the fact that the government takes a smaller percentage of each American’s paycheck. This process has worked four times in the past hundred years during the 1920s (under Secretary of the Treasury Andrew Mellon), the 1960s (President Kennedy), the 1980s (President Reagan), and the 2000s (President George W. Bush).

Additionally, President Bush’s tax cuts had the effect of shifting more of the tax burden to upper income taxpayers. The top one percent of income earners currently pays about 33% of all income taxes versus 32% before. This is because the tax rates were lowered for Americans of all tax brackets with lower income tax payers realizing a larger percentage decrease than higher income taxpayers. The top 50% of income earners pay 96% of income taxes. On the other hand, the bottom 50% of income earners pay only about 3% of income taxes.

As President John F. Kennedy said, “a rising tide lifts all boats.” Tax increases, even on only one segment of the country, slow the economy and take money out the pockets of all Americans, even those not taxed directly. On the other hand, a tax code that allows Americans to keep more of what they earn helps us all.


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