Monday, September 19, 2011

Why The Rich Should Not Pay More Taxes

Once again the tired idea that the rich need to pay more in taxes is making the rounds and being preached by Warren Buffet, President Obama, and apparently Matt Damon.

It sounds so simple and so fair.  "People that have money should help others by paying more taxes."   On the surface it is such a hard point to argue with, unless you have time to really sit down and discuss the deeper issues surrounding this idea.   It just so happens that we do have time for that today, so let's discuss!

First, let us break down the statement, which really has two parts.   The first part has to do with the idea that people with resources should help those that do not have resources.   Yes, Yes, Yes!!!!   Who could argue with that statement.    That idea is what makes our country so great.  No other country in the world donates more time and money to charities than the United States.  It is the "American Way" to give of ourselves and our time to help others.   We only wish that more Americans would find ways to help, but overall we can feel proud of our selfless nature.

The second part of this idea is what is so concerning.  The idea that paying taxes is "helping others" is simply not true.  Yes, some of what the government provides does benefit some, but that help comes at the expense of many others, and at a very high price!   This is because the government is very inefficient overall.   Every $1 paid in taxes results in far less than $1 of value on the other end.   That means that the government is wasting resources that could otherwise have been used to benefit others.   Yes, many charities and other organization have inefficiencies as well, but we are free to donate our money to those that are most effective and efficient at delivering benefits to others.  That freedom of choice drives charities to strive for better efficiencies in an effort to attract more donations. Those that are not run effectively should ultimately go away as funds dry up.

When we pay taxes, we don't have that choice.  There is virtually no accountability for how those funds are used and how effectively they are managed to provide maximum benefit to others.  That is the whole problem in a nutshell.   It comes down to inefficiencies and total lack of accountability at the highest levels. When the government takes over, there is a significant waste or resources that could otherwise have been used for the greater good of society.

Of course, many will try to make the point that "people will save their money if taxes are lower, not donate it all the charity."   You may be surprised that the answer is "Yes, that is exactly right, and that is a great thing"!   First, we only need to donate a fraction our "saved taxes" to charity to get the same end result and benefit as we had from our entire tax bill!   If it was taking $20 a day to feed that child with our taxes, it now may only take $1 a day to feed that same child via an efficient, private charity.  That leaves $19 to spend or save as we see fit via our individual freedom and liberty.  If we save every dollar, what we end up with is a nation sitting on trillions of dollars of savings, rather than trillions of dollars of debt!   That is real financial strength that can be put to use in the most effective manner in an effort to earn a decent return on investment.  If that money is spent, money flows into the economy in a way that rewards innovation and hard work.  Don't let anyone try to tell you that "saving" is a bad thing for our economy.  Saving is what creates strong, innovative, growing economies that can weather any financial storm.

Another argument used for suggesting we need to raise taxes on the rich is that it is not fair for Warren Buffet's secretary to pay a higher percentage in taxes than Warren Buffet pays himself.  Again, it sounds so fair and so simple.  However, there is much more to this beneath the surface.  Capital and investment are the fuel that power the global economy.  Capital flows like water, in that it always chooses the path that "it presumes" will bring it the best rate of total return.  The implications are simple.  If we want to grow our economy, we must create an environment that attracts capital from around the world.  We cannot have our cake and eat it too, in that we cannot force capital to flow into the United States AND have a tax and regulatory environment that is not capital friendly.  If we raise taxes on those the control the flow of capital and make the investment decisions, we will force capital away from the United States.  The results are very clear and affect EVERY American... higher unemployment, lower wages, more poverty, decreased standard of living, higher prices, and higher interest rates.  Again, capital is the fuel that powers our economy and the ability to the earn a return on investment is the primary reason the United States is the greatest country in the world today.  The only way to get our country back on track is to take every step possible to ensure that more capital flows into our great economy!

We have not even mentioned the notion of unintended consequences.  It is very hard to raise taxes on the super-rich, because they have the resources to find new ways to shelter their wealth from those new tax increases.  Most average Americans would be amazed and dumbfounded to realize just how complex and sophisticated the tax laws are and see the almost unlimited tactics available to shelter wealth.  It is a game of cat and mouse, and the mouse always gets away before the cat can act fast enough!  The unintended consequences are how those new tax laws will affect the average American family.  It is hard to predict, but there are always unintended consequences that nobody could have ever imagined and the little guy usually gets the short end of the stick.

Yes, we all need to donate our money and more importantly, our time, to help others.  However, the notion that paying taxes is the best way to achieve that help is a terribly misguided idea.


TAGS: Rich should not pay more taxes, Warren Buffet Taxes, Matt Damon Interview, Debt Ceiling Interview, Debt Crisis, Tax Policy, Rich Pay More Taxes, Obama jobs bill, Obama taxes

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