When we soak the rich, we all get wet

With the Democrats in charge of our government, one familiar refrain we have heard a lot and will continue to hear is how it is time for wealthy people to “pay their fair share.” Rich folks got way too much in the way of tax cuts when the Republicans were in charge, the reasoning goes, and they will not be so fortunate with the party of the common man running the show.

I’ll be the first to admit that rich people can be pretty annoying. There is something that seems fundamentally unfair about the fact that there are people walking around wearing shoes that cost more than my entire wardrobe. So why shouldn’t rich old Uncle Moneybags pony up a little more at tax time when there are so many of us struggling just to get by?

Well maybe he should, but I think there is an important point that tends to get lost when we get on these “soak the rich” kicks. There seems to be an assumption on many people’s part that there are no real consequences for taxing the wealthy. That is a very misguided and dangerous assumption.

To illustrate the point, let’s try a little thought experiment.

Imagine that, tomorrow, you win the lottery. The lottery is going to pay you, say, $10 million a year for the rest of your life. Congratulations - you’re rich, and the rest of us hate you. Now let’s say that the first year, the tax rate for someone like you is 25%, or $2.5 million. Then let’s say the next year the Democrats take over, and your tax rate goes up to 50%, or $5 million.

You still have $5 million a year to live on, the rest of us still hate you, and now the government has $5 million a year to do great things for the American people. So what’s the problem here?

Well, let’s say the tax rate had stayed the same (25%) instead of going up. What would you have done with that extra $2.5 million? Chances are that you wouldn’t have taken it home and stuffed it in a mattress.

Maybe you’re the conservative type, and you’d have put it in the bank. The bank would have used that money to make loans to people, perhaps to build houses or start businesses. Or maybe you’re a little more adventurous and you’d have invested it, or even started a business of your own. Either way, our ailing economy could have used that $2.5 million, but now it’s gone into Uncle Sam’s pocket.

Or maybe you’re a hedonist, and you’d have just blown that $2.5 on buying stuff, or taking trips. Still, when people buy things or spend money on travel that money gets plowed into the economy. Somebody has to build those expensive yachts and sports cars, and hotels and airlines employ lots of people too.

But once again, thanks to that 50% tax rate, you won’t be taking that trip around the world or buying that extra sports car this year. I don’t feel too sorry for you, but I might feel sorry for the guy who worked at the yacht factory or the clerk at the four star hotel who just lost his job thanks to our “soak the rich” tax policy.

I’m not arguing against a progressive tax policy here, I’m just saying that it is a mistake to assume that we can raise taxes on anyone, even those snooty rich folks, without there being negative consequences that reach out and touch all of us. Before we raise taxes on anyone we would be wise to ask ourselves what that money might have done for us if it hadn’t been taken out of the hands of private citizens and put into the hands of a federal government that has not always proven to be a wise steward of its finances.