Wednesday, May 12, 2010

The Utter Folly of Class Warfare, Part I

NOTE: I posted this last month on Apricotpie, but I thought I should post it here as well. I'm still working on Part II.

We hear it all the time. It’s about the only thing that a majority of “main-stream” Americans and the political elitists agree on. The middle class pays too much in taxes, but the rich don’t pay enough. “Tax the rich!” they cry. “Make them pay their fair share!”

Too many of us buy into this lie. I hope that if you are among them, that you will consider my argument and rethink your position. Here is a fundamental principle of life:

You cannot help the wage earner by tearing down the wage payer.

In other words, when money is taxed away from the rich, it is money that they cannot spend expanding their businesses and investments, which creates jobs; raising tax rates on the rich results in higher unemployment. When the government raises tax rates on the rich, the rest of us end up paying for it.

Not only that, when the rich see their tax rates go up, they get jittery, because for all they know their tax rates may just go up again. One percent higher this year, another one percent next year. So they become more cautious, taking less business risks, expanding their businesses less, and employing less people.

Let me give you an example, to illustrate to you how just a small fraction of this works out. Say there’s a really rich man. We’ll call him Rich. He lives in Oregon, and he owns (among many other enterprises across the world) a chain of fine buffets in Texas, called Rich’s Steakhouse. He usually makes about half a billion dollars a year. In 2010 his federal income tax rate was, say, 25%, and so he paid Uncle Sam $125 million of his dough, leaving for himself only $375 million. On top of that, he had to pay, say, 10% of his half-a-billion to Oregon, leaving himself with only $325 million from that year. But, due to political maneuvering and deals in Washington, the “Bush-tax-cuts-for-the-wealthy” are about to expire, and Rich’s federal tax rate will go up automatically next year, say to 27 percent. And Oregon voters have decided that the rich just aren’t taxed enough, and need to pitch in more to fund their schools and police department (which are facing budget cuts because state politicians in Salem decided to spend money on their pet projects first). Rich’s state income tax is raised only one percentage point, to 11%. Now, instead of paying 35 percent of his earnings in taxes, he is paying 38%, a loss of $15 million.

Small, you say? He’s still filthy rich? He can afford to contribute more? Sure. Of course Rich can afford to contribute more. But the real question is, can we afford for him to contribute more? You look surprised that I would say such a thing. Well, listen and I’ll explain it to you.

Rich is looking at how his tax rates are rising. He also looks at the news, and sees politicians telling everyone else that people like him have an obligation to contribute even more. “Uh-oh,” thinks Rich. “My tax rates are probably going up AGAIN.”

Now, Rich loves his home in Oregon. It’s beautiful country, much more beautiful than dry arid Texas. He wants to expand his buffet chain and bring it to Oregon. However, with the way things are going with his taxes, both in Oregon and across the nation, Rich doesn’t want to risk as much of his precious capital to expand his various business enterprises (and create jobs). He decides he needs to cut back and be cautious with his money; one of the things he cancels is his plan to bring Rich’s Steakhouse to Oregon.

Well, Rich has a friend in Oregon, a business consultant named Jonathan. Rich was planning to hire Jonathan to help him with opening his buffet. But, since Rich has cancelled his plans, Jonathan doesn’t get the job. Not only that, many other people like Rich are also cutting back their business ventures, and Jonathan isn’t getting a lot of consulting business. He and his wife decide to cancel their plans to remodel their house. Jonathan breaks the news to his friend Jack the remodeler. “Sorry, Jack, I just can’t afford the remodel right now. I was also going to recommend your services to Rich when he built his new restaurant, but that’s not happening either.”

Jack goes home and has a talk with his wife Sarah. “We’ve got to make cuts in our living expenditures,” he tells her. “I’m just not getting the business I used to be getting; for some reason the rich people aren’t asking for remodeling services as much as before. These are tough times.”

After much discussion, they come up with things they can cut. Every little bit helps. “I hate to do this,” says Sarah, “but I’m going to call the piano tuner and tell him we’ll skip getting our piano tuned for a year.”

Hey! Wait a minute! I’m the piano tuner! They were going to pay me a hundred bucks for that!

Rich wasn’t contributing enough to society, so they raised his taxes. After all, he can afford it. Well, just look who ends up paying for it! The little guy, trying to expand his piano business, and still living with his folks because he can’t afford to go out and rent his own place.

Let’s review, shall we?

Rich’s taxes get raised. He has less money to invest in expanding his business, so he cuts back and doesn’t hire Jonathan. Jonathan has less income. He cuts back and doesn’t hire Jack. Jack has less income; he cuts back and doesn’t hire me, and I have less income. Well, maybe I’ll just cancel that trip to Southern California I was planning on. I won’t buy a plane ticket, and South West Air will have less business. There’s a lot of people experiencing the same kind of hardship, and cancelling their trips. South West lays of some of their employees, some of whom are from Texas. These now un-employed Texans decide not to eat out at Rich’s Steakhouse anymore, and (what do you know!) Rich’s gross annual income next year won’t be as large as he was hoping it would be.

Let me repeat this lesson again. When the rich have more money taken from them (’cause they can afford it), the effect of it trickles down and we all end up losing money. I’m sorry if this sounds harsh, but it is the truth: Those of you who think it’s all right to raise taxes on the wealthiest people to pay for services for the rest of us (’cause they can afford it), when the economy sours and you become unemployed, you have no one to blame but yourselves, because you have supported the policies of class warfare.

I beg you, for your sake, my sake, and the sake of our nation: please reconsider your position.

1 comment:

Molly said...

Thought provoking insights James!