Why Not Soak the Rich?

Not all of them are that wealthy, and hurting them won’t help the rest of us.

Victor Davis Hanson
Thursday, December 9, 2010

For the last two years, $250,000 in annual income has been an arbitrary line in the sand of a renewed class war. Those above it must have their income taxes raised. Those below it are deemed more virtuous and so deserving of a tax cut.

But who exactly are the “rich”? Zillionaires such as Warren Buffett, Bill Gates, and George Soros surely are. But these wealthiest individuals have so much money at their disposal that they don’t care much about income-tax rates. Their tax lawyers have found ingenious ways to divert millions of what would be owed to Uncle Sam by funding tax-free pet causes, private foundations, and favored charities – in a way not available to those who make far less than a million dollars a year.

Is annual income a good gauge of wealth? Who is richer — the architect in Monterey, Calif., who makes $250,000 a year and who paid $700,000 for a modest house while picking up the full tab of $50,000 a year for his daughter at a private liberal-arts college, or the engineer in Salt Lake City, Utah, making $100,000 a year who has a house twice as large at half the cost, and whose son is on a need-based scholarship at the university? Should annual income alone trump all other considerations when the costs of living vary widely by region, and eligibility for billions of dollars in federal and state subsidies is predicated on income levels?

By the same token, what exactly is “poor” in a globalized world of cheap imported TVs, cell phones, and high-tech gadgetry available to most Americans at Walmart and Target? The middle class today has better access to what were once called luxury items than did the super-wealthy just two decades ago.

How do we define tax “cuts”? Were the George W. Bush income-tax rates really “cuts” for the rich? Or were they across-the-board cuts only in comparison with the higher Clinton rates? In turn, were the Clinton rates actually “hikes” on top of the George H. W. Bush “hikes”? Both upped the lower Reagan rates, which in turn had been “cuts” from the higher Carter rates. In fact, every president’s newly adjusted income-tax rate is derided mostly on partisan political grounds as either a counterproductive hike that “kills small business” or an unfair “trickle-down” cut.

Income taxes don’t operate in a vacuum. That the “rich” should pay 39.5 percent on their income might seem justified in isolation. But what about property, state income, payroll, and other taxes that, combined with federal income taxes, can take up to 65 percent of some incomes in high-tax states?

In addition, income taxes are already graduated, so one pays a higher percentage of one’s income the more one makes. Yet 50 percent of Americans pay no income taxes at all, while 5 percent of taxpayers pay nearly 60 percent of the total collected. The result is that half of Americans are likely to favor both higher entitlements, which they may well receive, and higher income taxes, which they most certainly will not pay.

Did the staggering annual national deficit arise from a lack of revenue or out-of-control spending? California manages to have the highest income, sales, and gas taxes and the largest deficits. Over the last decade, federal income-tax revenue — and budget deficits — have increased almost every year.

Income levels are not static. Belonging to the upper brackets is not always a matter of privilege or inheritance. Some Americans go in and out of the top tax brackets depending on the economy. Others are “rich” for only a few years in their 50s and 60s — making far less before and after.

If we prefer high rates, we will see either more tax avoidance or a certain reluctance to work an extra day, buy new equipment, or hire a new employee — given that any additional income will be mostly eaten up in taxes. Those who make over $250,000 are those who would be more likely to hire new employees, and they usually can do it far more efficiently than the federal government.

Finally, if the goal is to increase federal revenue, then it is wisest to keep taxes as they are. That encourages Americans to make as much as they can and to hire and buy, thereby enriching the nation at large. But if the aim is instead to ensure that we mostly end up about the same, then raising taxes on the already highly taxed might make us more equal — and collectively all poorer as well.