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How much is too much?
The “Fiscal Cliff” has been averted. (Another “crisis” essentially fabricated by the media to sell papers) No surprise there. Neither party wanted to gamble that they would get blamed. However, a return to the pre-Bush tax rates would not have been a catastrophe. Nor would the “planned” cuts in federal spending have been disasters, except for those suddenly finding their federal program cut or eliminated. So let’s return to the mundane topic of “wealth redistribution” i.e. higher tax rates on the wealthy (and taxes on all wage earners) to pay for entitlements. To recap Part I: the wealthy rely on many others for their large incomes so a progressive tax is reasonable. Part II makes the point that taxes should be capped at less than 50%. Now that the fiscal cliff dust has settled, the highest tax rate was raised from 35% to 40% (39.6 to be precise) on incomes over $400,000. Not a headline grabbing change. France is considering a 75% tax rate on its highest earners – bad idea (more on this below). For all of the noise about the wealthy/rich not paying their fair share, 40 % FICA + state + local taxes could push their total tax bill to over 50% of their earnings. Sounds like more than a fair share to me. Yes, many of the rich, e.g. Warren Buffet, make most of their money from investments, and the investment gains tax rate was raised only to 20% (from 15%), see Taxes on investments, below.
Why shouldn’t the wealthy and rich pay more than 50% of their Adjusted Gross Income (AGI) to federal, state and local taxes? I would argue this is counter to the principles that made America great, specifically the American principle, ” We realize the fruits of our labor”. We should all be working harder for ourselves than we are for everybody else. We should keep more than half of what we earn. Therefore, one’s total tax burden (income given to others) should not exceed 49% of AGI. To me this is a self-evident truth. And from a practical standpoint, when I start seeing more than half of my earnings go to others, I have to ask myself, “Why am I working so hard?” If we dis-incentivize our most industrious people, we run the risk of losing their industriousness. This would become a case of the falling tide grounding all boats. We don’t want to discourage those who develop: new products, better ways to produce them, better ways to market them… because this benefits all of us in the long run.
Taxes on investments
Very simply, profits pulled out of the investment funds (rather than reinvested) should be treated as income and taxed as income. It shouldn’t be difficult to write laws differentiating profits which are “business” monies used to operate the business from “income” monies used for personal wants.
Again the status quo is acceptable but messy and complex. I propose that all businesses inherited intact and maintained for at least five years be exempt from inheritance tax. The country as a whole benefits from healthy, successful businesses whether they are huge international companies or a small mom & pop business. However all forms of cash, stocks, bonds, and businesses sold within five years should be taxed (allowing five-year averaging) as income for the recipients.
This topic is too big and complex for today’s blog. I’ll simply say businesses should be taxed in a way that encourages large businesses to stay in the U.S. and enables small businesses to stay healthy.
At this point I will claim to have made the point that morally and ethically a total tax burden of 49% on the highest earners is legitimate and appropriate. However is taxing the wealthy as much as 49% wise? Will the 49% of their income paid to the rest of us be the best use of that money? Will our federal, state, and local government officials and employees use that money in ways that benefit our national community more than if the money is either spent on products and services or invested to grow more business(es)? Again I will argue that the status quo is acceptable, not optimum, but acceptable. Putting this much money into the public coffers is a good use because 1) we must reduce the federal deficit, and 2) there is presently a large sum of private money ($3 Trillion per some reports) already sitting idle that could be invested. Lower taxes are not necessary to incentivize investment of this money, which would grow the economy for all.
If we are to give our Grandchildren a better America, we need a balanced budget. We have taken some steps towards increasing revenues. Next we need to take steps towards reducing government expenditures so that our Grandchildren do not inherit a huge deficit.