Tax the Rich, Hurt Everyone  

By at 4 December, 2019, 3:05 pm

by Raymond J. Keating-

The political Left has a tough time with economics, especially the economics of taxation. Specifically, they’ve put forth all kinds of proposals to “tax the rich,” as they like to put it, and believe that only the rich will pay in the end. Of course, that’s not how taxes work.

In reality, when politicians put forth ideas like imposing a “wealth tax,” higher income tax rates on upper income earners, and an increased estate tax, the effects of such taxes spread far and wide throughout the economy.

The most obvious point is that resources are drained from the private sector where they would have been used for investing, saving, consumption and/or charity, while being subject to competition and consumer sovereignty; and handed over to the government, where resources would be reallocated according to political incentives, such as rent seeking, special-interest lobbying, and the waste commensurate with government spending other people’s money.

The second major point is that incentives are altered in a negative way. That is, with a wealth tax, higher income and death taxes, incentives are reduced for productive economic undertakings, namely, the risk-taking activities of entrepreneurship and investing that are critical for economic, income and employment growth.

But let’s take a moment to zero in on the workings of the market in a couple of areas.

Entrepreneurship, Capital Access and Generosity

First, entrepreneurs looking to build their businesses need financial capital. After tapping into their own funds, and seeking investments from family and friends, they need to turn to the marketplace. For example, angel investment is a vital source of funding for startups and early-stages businesses, while venture capital plays a major role in funding high-growth firms with the eventual goal of hitting the public markets.

Angel and venture capital investors overwhelmingly are wealthy individuals who have succeeded in assorted businesses and industries. They have accumulated the financial capital necessary for making investments in new and growing businesses. Such investment is vital to the economy, and therefore, wealth taxes, death taxes and high income taxes all serve to undermine the growth in the economy, incomes and jobs that we all wish to see and from which we all benefit.

And what about charity work? It’s a similar situation. Consider, for example, a new Gallup poll showing that nearly all upper-income investors donate to private charities. Specifically, Gallup reported: “97% of upper-income investors in the U.S. say they have donated money to a charitable organization in the past year, according to a Wells Fargo/Gallup survey of investors. Majorities of upper-income investors identify four factors as major reasons behind their decision to donate — 78% strongly believe in the causes they support, 71% want to make a difference, 62% enjoy helping others, and 56% have a personal connection to the issue or organization.”

The group interviewed were individuals with household incomes of at least $240,000. As Gallup pointed out, “These investors are equivalent to the top 5% of U.S. households nationwide.” That is, these are the individuals targeted by efforts to increase income taxes and inflict wealth taxes. Therefore, it is inevitable that charities are going to be negatively impacted when their donors – that is, their major donors – have fewer dollars left after taxes to donate.

So, make no mistake, taxes on the wealthy in no way only affect the wealthy. Instead, the negatives of higher taxes on upper-income earners are felt throughout the economy. To sum up, if you’re pro-entrepreneur, pro-small business and pro-charity, then you cannot favor higher taxes on upper-income individuals.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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