There is a natural assumption that there is no penalty to society if we raise taxes on the rich. Movie stars, CEO's, sports stars that make millions; they are our target. After all, they won’t even miss the money. Ahhh, if it were only that easy. But it is nowhere close to the truth.

It is claimed that the rich do not spend their extra money and therefore they would not decrease their consumption if their taxes are raised. True. The rich spend what they need to spend and want to spend, out of their first million or two. But the second million or two are invested. This is money they couldn't spend if they tried. This forced savings is money that goes into the banking system, or the stock market, or bond market. It is money that goes into the private economy to finance new products, new projects, and new ventures and even government itself.

This is the money that goes to new business start ups, mortgages for new home buyers, and credit lines for the purchases of inventory and the payment of salaries by small businesses. The money is investment money that is lent out for all kinds of private productive endeavors. To the degree it was not there, the growth of economic activity would not be there.

When government raises the tax rate on the rich, it takes the money directed at production and gives it, for the most part, to government employees. The result is that the money goes into government projects rather than private projects. Is there anyone left on earth that can argue that government directs capital better than the private market? Even if government subcontracts it out to the private sector or redistributes it to the needy, they are a middle man that must be paid. A middle man that's usefulness is very questionable.

Milton Friedman was the first to suggest that the most efficient way to redistribute wealth if you wanted to was not to send it to Washington to spend on make work programs, but to simply divide the money up among those you want to give it to and send them out a check directly. All the rest is bureaucracy, and that could be eliminated.

Which leads us to the other outlandish argument made to allow tax rates to go up on the rich: "Tax cuts need to be paid for. It will cost the government hundreds of billions of dollars over the years if taxes are reduced". Think about that. If we raise taxes, the money goes to government. If we don't it stays in the private economy. Where is money best used? In the government sector or the private sector? Taking hundreds of billions of dollars out of the private sector during bad economic times is nuts! "paying for tax cuts" always means taking money from the private sector and giving to the public sector and paying a
middle man to do it.

We just spent over a trillion dollars on stimulus and we have seen federal government employment go up, as private employment went down, government pay go up, as private pay went down, and government benefits go up as private benefits went down. Is this the best use of money?

As it is, federal government wages are a full 40% greater than private wages for the same work. And the spread is even greater when benefits are taken into account. Then there are the bridges to nowhere, the waste and abuse. And the fraud that is much more pervasive within government than in the private sector.

When all is said and done, taxing the rich is not taxing a person; it is taking money from productive investments and redirecting it to dubious government projects that cost much more than the private sector produces. Taxing the rich really amounts to taxing the economy! All services and products are supplied by humans. Whether they are in the government or the private sectors is irrelevant except for costs. So, taxing the rich is simply taxing the private economy and subsidizing the government economy. In the last analysis, we, the average worker, loose.

Further, corporations and businesses do not pay taxes. They pass them on to us. A tax on a business is a cost. It leads to an increase in prices or a reduction in employment or supply. When the government tells us that they are going to tax the rich and rich corporations, the target ends up being us, the consumer.

Millionaires, sports figures, and movie stars are rich. It is correctly said that if taxes were raised on them, they would still manage to eat the next day. This silly argument completely misses the point. Since certain individuals are rich and could never spend all the money they have in the short run, they are forced to save and invest. It is that money that is lent out to innovators and creators that are the fountainhead of economic progress.

For government to confiscate that money by force is not only immoral, it is impractical and is not a solution for long term growth. There is a case to be made at times for higher taxes. Taxing the rich because "they won’t miss the money" is not one of them. It will be us; you and me, that will be the losers; in that proposition.

Taxes can arguably be raised to take money out of circulation when too much has been added by fiat. And taxes can arguably be raised in war or an emergency. And taxes can arguably be raised to pay off debts of promises made. We must remember that what we vote for, we are responsible for. And no one else but us should be liable for our debts.

If it comes down to having to raise taxes for the services we have demanded -- well that's the price we must pay. Assuming we can simply tax the rich for our reckless spending is not a solution. It is theft and an illusion. And it will ultimately be passed right back down to us where it properly belongs. Does "there is no such thing as a free lunch" ring a bell?

Paul Nathan
Paulnathan.biz