This article was originally published by Forbes.com on December 10, 2010
The Democratic Party's passionate opposition to President Barack Obama's agreement to extend all of the current personal income tax rates is based on one of the great political con jobs of the last 100 years--that raising the top personal income tax rates is a way to "tax the rich."
The "tax the rich" mantra is seductive. It is based on the philosophy that taking money from those with higher incomes and using it to fund government programs will produce a more just society. It sounds like an easy way to reduce the Federal government's growing debt. And it assumes that those with lower incomes will bear none of the consequences of the higher tax rates on the wealthy through job loss, lower pay or high consumer prices.
This narrative conveniently ignores three inconvenient truths:
--Personal income taxes are levied on income, not wealth.
--The rich can (and do) shift most of the burden of higher tax rates to the middle class.
--Over time taxes targeted at the "rich" today often are broadened to reach into the pockets of the middle class tomorrow.
Con job No. 1: Higher tax rates are aimed at the rich.
Have you ever wondered why some of the richest people in America, not the least of whom is Warren Buffett, support raising tax rates on the rich?
How can this make sense? If Buffett and other billionaires do not think they are paying their fair share toward government programs, they can voluntarily send the government an additional check. So why would they favor raising taxes on those who make as little as $250,000 a year, an amount that is less than one one-hundred-thousandth of Buffett's total wealth.
One answer is that raising tax rates on individuals with incomes of more than $200,000, or married couples with incomes above $250,000, may have no affect at all on the amount the rich pay in taxes. Families with a billion dollars of wealth do not have to earn another dollar of income to maintain their lifestyles. They could hold all of their assets in cash and still be able to spend $20 million a year for the next 50 years on whatever they please.
For the truly rich, engaging in economic activity and paying taxes is voluntary in every sense of the word.Although a billionaire's lifestyle would be unaffected by forgoing all income, the rest of us would lose the value that billionaire's contributions would have made to the economic life of the community. We would never know what start-ups died for lack of venture capital, what businesses failed because of the absence of management skills, and what philanthropic activities that otherwise would have engaged his or her interest would fade for lack of funding. Buffett's contribution to the wealth of the American economy through the astute investments he has made with the assets of his company, Berkshire Hathaway, far outstrip the dollar value of his sizable fortune.
In reality, the call to "tax the rich" is a cover story for levying higher tax rates on the prosperous middle class. Ironically this is especially true in the high-cost metropolitan areas that are the Democrats' strongholds. In New York City, for example, a couple with $250,000 a year in income can barely qualify to purchase a modest three-bedroom townhouse in one of the nicer sections of the borough of Queens. And they most likely commute to work using mass transit. Hardly the lifestyle of the rich and famous.
In addition, the "tax the rich" mantra assumes that the same individuals make the same amount of money each and every year. The reality is that, in many cases, producing an annual income of $250,000 is achieved after years of hard work and career advancement. Those who report incomes of more than $250,000 in a single year in many cases are also individuals who have owned and operated a business, built it over a life-time as they earned a modest income, and sell the business in the current year.
Thus, the higher tax rates the Democrats say are aimed at the rich actually are targeted at the baby boomers as they hit their peak earning years. There are no precise data on the demographics of those who make more than $200,000 a year. But based on Census data for 2007, the latest year available, it is clear that incomes tend to peak between the ages of 45 and 64--that is currently for those who were born between 1947 and 1966. Of the 23.6 million households with incomes of $100,000 and more in 2007, 12 million, or 50%, were within this 20-year group of baby boomers.
But where is the justice in reducing these individuals' financial ability to pay for their children's college educations, save some extra money for retirement or take a nice family vacation?
Finally the sheer intensity of the liberal and progressive movement's desire to raise tax rates on the prosperous middle class, baby boomers and small-business owners suggests that their motives run deeper than any sudden concern over the size of the government's deficit. Such intensity, however, is consistent with a political class that is responding to the power motive.
When viewed in terms of a long-term struggle for power, the Democratic Party's hostility to individuals who earn more than $200,000 a year, or families with incomes above $250,000, can be viewed as channeling the aristocrats of old. They too denigrated and despised the bourgeois and newly rich who engaged in commerce as shopkeepers and merchants, activities deemed beneath the ruling class. Over time those who engaged in commerce created more wealth, and gained enough power to overthrow the prerogatives of the aristocrats, much as the Tea Party movement seeks to reduce the power of the Federal government over our lives, our communities and our fortunes.
Although self-righteous in the belief in the nobility of their cause, those who seek to raise the top personal income tax rate in the name of "taxing the rich" are, whether they know it or not, engaged in a con game aimed at deflecting attention away from their quest for power at the expense of the liberty of the American people.