Thursday, April 14, 2011

Obama's "soak the rich" plan misses mark

(Center for American Progress Action Fund)
When President Obama gave his long-awaited speech on deficit reduction today, it was predictable that his prescription for curing the government’s spending problem would be to raise taxes.  There are several problems with this strategy that the president does not address.

First and most important is that taxing the wealthy cannot solve our spending problem.  The Wall St. Journal has noted that even if the IRS confiscated 100 percent of the taxable income of all Americans who earn more than $500,000, it would only provide $1.3 trillion in new revenue.  They further noted that confiscating all taxable income over $75,000 would barely cover the $4 trillion that Obama and Congress spent in 2010.  Obviously, a 100 percent tax rate is not possible.  The US needs economic growth to boost tax revenues; raising taxes on “the wealthiest Americans” cannot and will not solve the problem.

The second problem with President Obama’s strategy is that very few rich people are stupid.  Most of the wealthy that are stupid employ financial advisors who are not.  When taxes go up on millionaires, it usually follows that there are fewer millionaires around to tax.

As an example, another Wall St. Journal article details how after Maryland enacted a millionaire tax in 2008, the state found that a third of its millionaires had flown the coop.  It is likely that many of them settled in states like Texas, Florida, or Tennessee where there is no state income tax.  If the federal government raises taxes on millionaires, there will be nothing to stop them from transferring their residences to tax havens in the Caribbean or elsewhere.  After a tax increase, Uncle Sam could easily end up collecting less money instead of more as Maryland’s state government did.

Many wealthy and politically savvy Americans already use the friendlier tax laws in other countries to shelter money and assets.  One prominent US tycoon who is rumored to be considering a presidential run is well known for flying around the country in a privately owned 727 with a Bermuda registry.

Finally, voters should ask themselves why President Obama is pushing for a tax increase on the wealthy given the fact that the wealthy typically support Democrats by large margins.  It is not logical that the president would bite the hand that feeds the Democratic Party with millions of dollars in campaign donations. 

The obvious answer is that the wealthy won’t really be paying the tax rates that President Obama proposes.  Any increase in tax rates is likely to be quietly accompanied by new tax shelters, write offs, and other assorted means of avoiding a bigger tax bill.  It is unreasonable to assume that rich, powerful, and influential people who helped put President Obama in the White House and most Democrats in the respective congressional seats will sit idly by and let the government take their money.

The biggest effect of a tax increase, even if it is solely aimed at the wealthy, would likely be to slow the recovery and possibly even plunge the economy back into recession.  If money is removed from the economy, whether by being sent to the government or fleeing to tax shelters, the economy shrinks.  Less capital is available to businesses to hire and expand.  The effect trickles throughout the economy as sales fall, followed by wages and employment rates.

Nevertheless, the siren song of increased revenues, often a code phrase for tax increases, can infect the right as well as the left.  Georgia’s own Senator Saxby Chambliss is rumored to be considering a compromise budget that might include tax increases as a member of the “Gang of Six.”  However, Chambliss says, “We’re not talking about raising taxes….  We’re talking about lowering tax rates.”

America’s problem is not that we are taxed too little.  The problem is the out-of-control spending of both parties.  The solution is not tax increases that are too little, too late and in any case would trigger more spending.  The only practical solution is to drastically cut spending.  The solution, however, is an anathema to the president who, in less than two years, added more to the national debt than the first forty US presidents combined. 

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