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

Original article: Taxing the Rich Doesn’t Work

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