Thursday, November 10, 2011

Taxes and The Rich

The battle of Washington and the question with our economy, is what to do about our taxes and our spending? First off, to clear the air, tax cuts on the rich do not create jobs. Every time there has been a tax cut on the rich the following decade has seen tremendous job loss and economic suffering. Every time taxes have been increased on the rich, the following decade has seen tremendous growth and prosperity for all. The rich do create the engine of the economy, no one can deny that, but just like in a car an engine does not drive itself. The rich may create the engine of the American economy, but it is the poor and middle class that drive that engine. Throughout the last 100 years there is ample evidence to suggest that a fairer and higher progressive tax system on the wealthiest Americans is what propels this country forward. When the rich are taxed less they are given less incentives to invest. I know that sounds backwards to the common perception of how to run a business, but it is true, especially to those who run a business. In the end we can fix our economy but it needs be done by implementing tax rules and breaking barriers for what we think grows the economy.

            The rich build companies and provide products for everyone to buy. This has been more true the last 100 years then at anytime in human history. How a company to makes money however is not always what is best for the country or an economy as a whole. As a country we can lower taxes on the wealthy but it is up to them to invest it. The problem with that thinking is businesses make decisions on whether to invest in growing their engine based on demand , not tax cuts. By simply taxing them less you are only giving them money to sit on. You're not incentivizing them to pay their people more, not to hire more workers, and not to grow their bottom line. Guess what? Through the tax cut, you grew their bottom line for them without needing to do any work. If you want to spur investment and stimulate the economy you need to raise taxes on the wealthy. This will encourage investment, encourage increased pay, and encourage hiring. Again, sounds backwards, right? If you own a business you see taxes as a business expense that does nothing for your company, and does nothing to grow your company. How do you avoid those taxes when tax rates are higher if you're a company? You avoid taxes by investing back into your company, you avoid taxes by hiring more people, and you avoid taxes by expanding your business. You avoid taxes by doing everything possible to get the deductions that would have otherwise gone to unproductive taxation and turned it into productive capital that is used to grow the company, pay people more, and expand the economy overall.

           Lowering taxes on the rich does not spur investment, it never has and it never will. This is propaganda that politicians have used for over a decade and have zero evidence to their claims. The very reasons why increased taxation on the rich spurs investment are the same reasons lowering taxes kills the economy. Sure the rich get that money, but the reason people are rich is because they know how to hold on to it. If they are making money from tax cuts, what'ss their incentive to grow their engines for the poor and middle class to drive them. If taxing the rich less boosted the economy then we should have never had the recession of 2008. We were at that point, head deep in the Bush tax cuts which, by Republican backers of the cuts, should have accelerated our economy. Well it did no such thing, all it did was line the pockets of the wealthy with borrowed money. This idea that lowering taxes on the rich started under the Reagan administration. Reagan was a fine President who truly cared about our country. He was a strong leader, communicator, and knew when to compromise and when to be firm. The Reagan tax cuts are generally used as evidence to show that tax cuts to the rich help boost the economy. While the economy did improve following the Reagan era tax cuts, it is false to say He cut taxes on the wealthy. The truth is that He created a flatter, fairer tax system which actually raised the overall tax burden on rich in America. While Reagan reduced the tax rate of the wealthiest Americans from 50% to 28% He eliminated most loopholes and tax deductions that only the rich benefited from. The result of the Reagan tax cuts was a net increase in what the wealthy paid in taxes, not because the economy improved, but because the rich couldn't hide their money in loopholes. Reagan did indeed lower tax rates but He did not lower taxes. In fact, the first year after the supposed tax cuts went into effect the overall tax burden to GDP on the US economy went up from 18% in 1986 to 18.8% in 1987.

              While it is false to say that lowering taxes on the rich stimulates the economy it is also false that raising taxes on the rich hurts an economy. The Reagan era is but one of several instances where taxes were actually increased on the wealthy and it netted a stronger economy. There is also many instances where the economy suffered after the tax cuts on the rich. While we are all aware of the tax cuts on the rich since the beginning of the Bush administration and the result of those cuts, many are not familiar with the host of cuts passed in the 1960's on the rich. Following many years of high taxation John F Kennedy agreed to start decreasing taxes on the wealthy and a few years later Lyndon Johnson followed suit. The economy we got, following those cuts were years of stagnate growth, high inflation, and a separation of earning power between the rich and poor, sound familiar? Now just because rising taxes on the rich does not effect the economy doesn't mean you can raise taxes on the poor and have the same affect. In the early 30's Herbert Hoover made the mistake of raising taxes, but He didn't raise them on the wealthy, but the poor and middle class. The drivers of the engine of our economy got starved by his tax policy and sunk the nation into a deeper depression.
Taxing the rich at no point in our recent history has hurt our economy, in fact, the opposite has occurred every time we have shifted the tax burden to a fairer more progressive system. In the 1940's, tax rates on the rich were boosted to 90% and stayed there well into the 1960's. Our economy flourished those 20 years after World War 2. In the 1980's Reagan raised taxes on the wealthy, followed by Bush raising them again, and followed by Clinton raising them again during his administration. By the late 1990's the rich were paying the largest portion of their income they ever had in taxes. We had the best economy we had ever seen, we had a 5 trillion-dollar projected surplus, and investment and technology were booming. Bush Jr. steps in and promptly removes most of the taxes the rich paid the previous 20 years, added expensive programs, and we were thrust into 2 wars, one of which was highly questionable.

                  The historical evidence speaks for itself, at no point over the past 100 years has taxing the rich more hurt our economy. There is little evidence over the past 100 years that tax cuts on the rich helped to jump-start our economy. From the increasing of taxes on the wealthy after World War 2, to the actual increasing of taxes on the wealthy during the Reagan years, raising taxes on the rich is exactly what we need now to jump-start our economy. If we want to incentivize companies to spur job growth, tax them more, not less. By doing so we will encourage companies to once again grow their engines and in turn create better drivers to control that engine. Right now we have a weak engine with no drives experienced enough or skilled enough to push the engine forward.

You can contact us directly at We are open to your opinions and welcome questions to our posts.

Latest financial news -