Why It's All Wet To Soak The Rich
So, everyone out there making more than $250,000 a year is going to end up subsidizing the rest of us who make less. Let’s pretend we can squeeze enough out of you folks to pay off our federal debt - just as it’s necessary to believe in Peter Pan if you want to visit Neverland. Most people whose income falls short of that plateau think this would be just dandy. Except some of us think that soaking the rich will work about as well as appealing for voluntary contributions to balance our nation’s budget.
This trade journalist began reporting on economics in 1977. Those were boom times for the construction industry and our economy in general. Alas, trouble was brewing. Double-digit inflation was raging and by the end of the decade interest rates were in the high teens. The economy was in a tailspin and these issues played a large role in the 1980 election of Ronald Reagan.
Something else remains vivid in memory from that era. Federal tax policy was skewed toward soaking the rich - even more so than today. When President Reagan took office in 1981, the top marginal income tax rate was 70%. That’s right, the IRS attempted to confiscate seven out of every 10 bucks earned once people reached the highest income plateau.
Note that word attempted. A stark reality was that almost nobody paid that 70% rate. Instead, a huge industry arose of lawyers and CPAs who themselves climbed to the highest income bracket due to their skill in exploiting tax loopholes. Hotels everywhere were booking tax shelter seminars. Many extremely wealthy individuals renounced their American citizenship and took up residence in one of several little Caribbean island tax havens that laid out the welcome mat for well-heeled Americans.
This points to a lesson that has never been grasped by the soak-the-rich crowd. It’s an economic corollary to Newton’s Third Law of Motion - to every action there is an equal and opposite reaction. Try to confiscate large portions of peoples’ money and you’ll find that just as you get them in your cross hairs, they dodge away.
As sure as the sun rises in the east, as the bite increases on taxpayers earning more than $250,000, they will seek out angles to retain their money. They will finagle cash payments, increase 401(k) contributions, invest in tax-free bonds, hang on to stocks rather than cash in capital gains, and plenty will just plain cheat. Rest assured the underground economy will grow larger. And/or, they will reduce the amount of income they earn. Many productive citizens near the threshold will decide it’s not worth working as hard for diminished returns, so two-income families will trade down to one breadwinner, people will take more time off, opt for early retirement and so on.
The soak-the-richers will then scratch their heads wondering why tax revenues are less than anticipated, and they will once again tap into the sacred creed of their ideology - increase taxes some more. Only this time, tighten up all the loopholes.
Except the tax fanatics are always going to lose that battle. Here’s why.
Let’s give credit where it’s due: our federal government employs some very smart people. Hundreds of these very smart people in the executive and legislative branches put their talents to work crafting ingenious tax laws and regulations that seem to cover every possible contingency. Then the statute takes effect on the private sector.
There the law engages not hundreds, but hundreds of thousands of equally smart lawyers and accountants who will probe for loopholes. As soon as one discovers something exploitable, that person will earn a lot of money spreading the word via articles, books and seminars. Tax law writers are like a rural teacher’s college trying to compete in football against the likes of USC and Texas.
Something else is worth recalling: the Reagan Administration slashed that top tax rate from 70% to 28%, and it set the stage for a quarter-century of the greatest prosperity in the history of mankind. The only balanced federal budgets we’ve had in the last half-century occurred during the Clinton Administration, driven not by high taxrates but by windfall tax dollars generated by that prosperity.
Supply side economics has always been treated with scorn by the soak-the-rich crowd, who have never figured out how it works or acknowledged that it does.