You Cannot Raise Taxes on the Rich

Thanks to the fiscal-cliff deal and the Obamacare tax, we now have a tax code that is more “progressive” than at any time since Jimmy Carter was president. It will be interesting to see what long-term effect that has on household-income trends. The results may prove counterintuitive.

Tax increases on high-income people may be redistributive, but not always in the way intended. That is because we pay taxes individually in the short term, but in the long term we pay taxes collectively: Individuals and firms pass on tax costs to employers and consumers to whatever extent they can, just like any other cost. But the same factors that make any given worker a high-income wage-earner in the first place are likely to make that worker one who can most effectively pass on tax expenses. Likewise, the most profitable firms in many cases will be the ones that have the most power to pass on tax expenses to consumers or suppliers.

A high-income worker is one who by definition is in high demand. The same factors that make him a high-income worker also enable him to demand higher wages in response to tax increases or other factors that diminish his real income. You see this all the time with financial and tech specialists who are recruited to positions in high-tax areas such as New York or California: Workers in that position, or headhunters recruiting them, simply add taxes and other cost-of-living factors into the starting point of income negotiations. A $100,000-a-year job in Manhattan is not the same as a $100,000-a-year job in Muleshoe.

Likewise, companies with very in-demand products (Apple, Mercedes-Benz) have the most ability to pass costs along to consumers, while equally powerful but price-constricted firms (Walmart) have the most power to pass expenses on to suppliers and other business partners. A tax hike on Walmart is not necessarily a tax hike on Walmart — it’s likely to be a tax hike on, for example, Cal Maine Foods, which relies on Walmart for a third of its business. In business as in love, the power in a relationship is always in the hands of the party with the least to lose by walking away from it.

Which is to say, it is not clear that you really can raise taxes on the rich, even if you try.

At the other end of the spectrum, low-wage workers are those who by definition are not in very much demand and therefore have the least ability to negotiate tax offsets. The same is true for less powerful firms.

So, let’s say you’re Walmart, and your top hundred inventory-management, systems, and finance guys all come to you looking for a 10 percent bump because of the fiscal-cliff tax hike and the Obamacare tax hike. Walmart does not live and die by greeters or Cal Maine eggs — it lives and dies by logistics and finance, and it really needs people who are good at that. It will work as hard to keep its top talent as Apple will to keep its top engineering and design talent. So where does Walmart go to get that money to keep its top talent? If you have 100 high-wage specialists you really need to keep happy and tens of thousands of low-skilled greeters, cashiers, warehousemen, etc., all of whom you are pretty confident you can easily replace, you are going to be tempted to shift some money from the big, low-skilled pot to the small, high-skilled pot. Likewise, if Walmart has a supplier that represents 0.01 percent of its sales but relies on Walmart for 33 percent of its own sales, who do you think is going to prevail if Walmart decides it needs to knock prices down by a nickel?

We may not consciously plan that kind of thing down to the dime, but people know that there is a difference between their pre-tax income and their real income, and people with the market power to maximize the former also have the power to maximize the latter. Put another way: Even a very progressive tax code “does very little to alter the market distribution of income.”

It is transfers, not taxes, that really generate such progressivity as we have in the United States. As Lane Kenworthy shows, the overall U.S. tax system — federal, state, and local — is not all that progressive in its effects, despite a very progressive graduated federal income tax. What low-income workers don’t pay in federal taxes, they make up for in state and local taxes, particularly sales taxes, which are basically a flat income tax for the poor. Kenworthy finds that each quintile pays about 30 percent of its income in taxes. But the system becomes much more progressive when transfers are accounted for.

Tax hikes on the so-called rich may decrease the private sector’s share of income, but they probably will not do much to decrease the real income of high-wage workers and may in reality increase government revenue at the expense of low-wage workers in the long term, though it is very difficult to disaggregate the complex relationships between taxes, wages, and prices. But those who say that they are most interested in economic inequality would do well to follow Kenworthy’s example and look at transfers rather than taxes. Means-testing Social Security and Medicare would do more to make the total package of taxes and transfers more progressive than any tax hike likely to pass Congress in the foreseeable future. It is also a reform that many conservatives and deficit hawks could support. This should be persuasive to those on the Left whose interest in tax hikes on the high-income is not strictly punitive, but I am afraid they are a very small minority.

– Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May.

Let’s add another wrinkle. When you know tax policy is going to change and its impact to you will depend on when you sell your assets, which class is most able to change when and how it sells.

Al Gore could decide to make less money (or even lose some) on his sale of his TV Network in order to complete the sale before the new tax laws kick in because he has so much money in the first place. People with a lot less money need the full profit from a sale. If that means they have to refuse a deal and conclude the sale after the new tax law kicks in, they’re screwed.

The rich are also more likely to be able to change when they pull money out of their stock funds, etc.

IOW, rich people ALWAYS have more choices when it comes to paying tax than poor do. And they have the smarts to exercise that choice to maximize the money they keep in their pockets.

Due to massive ignorance of economics and the collectivist habits of thought inspired by the Marxist doctrine of class interest,libtards don't realize that tax increases on the rich such as inheritance taxes, progressive personal income taxes,corporate income taxes, and capital gains tax,all operate in essentially the same way: they are all paid with funds that otherwise would have been saved and invested.

Less saving and investing leads to less productive expenditure, which leads to less demand for labor which leads to lower money wage rates for the average wage earner or lower supply of labor employed which leads to a lower standard of living for the average wage earner.

So, here is another example of a libtard perversity of result where trying to punish the rich ends up punishing the wage earners even more in the long run.

A high-income worker is one who by definition is in high demand. The same factors that make him a high-income worker also enable him to demand higher wages in response to tax increases or other factors that diminish his real income...
Likewise, companies with very in-demand products (Apple, Mercedes-Benz) have the most ability to pass costs along to consumers, while equally powerful but price-constricted firms (Walmart) have the most power to pass expenses on to suppliers and other business partners. A tax hike on Walmart is not necessarily a tax hike on Walmart...

Which is to say, it is not clear that you really can raise taxes on the rich, even if you try.

Pretty simple and true.

Few know it.

BLUF - Means testing for social security and medicare - it is nothing more than government approved robbery.

As both programs are currently configured participation is mandatory - you must participate.

So lets look at a high level performers Kevin Williamson mentions in his article. Since the taxes are now progressive - the high end performers pay more dollars than the low end performers. After working and paying taxes into both programs for 50 years, or more, they are told - at or near retirement - that they made too much and/or saved too much and/or worked too hard. Now they have to surrender part, perhaps a significant part, of their involuntary decades long contribution to social security and medicare.

What's the difference between this government decision and a robber sticking a gun into your back?

As for any agreed threshold you must remember two things - no Congress is held to any agreement made by a previous Congress. Finally, the 16th Amendment started with tax rates between 1% and 7 %. Prior to the Kennedy tax cuts the top marginal rate was 95%.

Where am I going? Means testing is a method to stealing more money from the producers and doing so when they have no way to recover. Take your monthly income and means test it then live on what is left. If that happens the resulting storm would remove every politician and political thinker from their positions of power. Do it at the end of a person's work history and the politicians and political thinkers might survive, at your expense, because you would be dead long before the case law was decided by the Supreme Court. Oh, excuse me, we can no longer expect to use the Supreme Court to correct mistakes made by the electorate - thank you loads of ** Chief Justice Roberts.

“Raise taxes on the guy who works on my car!
And on the people who invest in the company I work for!
And on my grocer, employer, landlord and everyone else I depend on... so I’ll have more money!”
Yeah, good article. Don’t approve of means-testing SS though future means-testing may be OK at a very high cut-off.

From the article:
“Tax hikes on the so-called rich may decrease the private sector’s share of income”.
It definately deprives it of money (wealth)- which would be invested and lead to more private-sector income to tax. All taxing of private-sector income is taking the seed for growth.

BLUF - Means testing for social security and medicare - it is nothing more than government approved robbery.

If you have the courage to examine the validity of this statement, consider the following:

1) Social Security and Medicare are “welfare” - inter-generational wealth transfers. They are promises made by politicians which cannot be kept. The left insists on compulsory universal Social Security “Insurance” and Medicare so that it will not be considered as “welfare”.

2) If you don’t believe me, ask the SSA to give you a summary of your SS contributions and estimated SS benefits when you retire. If you know how to work a spreadsheet, prepare one which lists your yearly “contributions” to SS, then double it to include employer “contribution” each year, and predict your contributions until your retirement date. Add interest at whatever rate you think the feds should pay (e.g., 3% per year). This yields the “value” of your contributions at retirement. Now subtract the projected “benefit” payments for the next 20 years of “retirement”. How many years of withdrawals does it take to deplete the value of your contributions?

Check this independently by consulting an insurance agent, and ask him what premiums you would have to pay each year for an annuity which would match the expected SS payments, and compare that to your expected “contributions” — the difference is welfare.

Conclusion: SS is a Ponzi scheme which requires an ever increasing pool of workers to make “contributions” to make the projected payouts. SS payments to middle class workers are subsidized by the working poor. SS is welfare, an inter-generational redistribution of earnings.

Medicare is even worse. Take the same spreadsheet, add up the Medicare “contributions”, and compare them to the cost of a single hospital stay for a moderately critical medical event. Why should a 20 year old with a wife and baby, without the proverbial pot to pee in, pay medicare taxes to subsidize the health care of someone retired with the property and wealth acquired during their working years?

Means testing SS and medicare benefits does not “rob” anyone. Means testing simply limits the amount of welfare provided to the middle class retirees.

If you work through all of these figures and still believe you would be “robbed”, then it could be you are suffering from Ponzi psychology (i.e., shoot the messenger who tells you that you have fallen for a ponzi scheme). See

Social Security, Ponzi Schemes, and Leprechaun Economics
GaryNorth.com ^ | Gary North
Posted on Monday, January 07, 2013 11:04:02 AM by DeaconBenjamin

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