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Defining the Enemy in the War on “The Rich”

Before fighting a war, it’s a good thing to know your enemy.

Our federal government spends almost $2 for every $1 it receives. Our national debt is now over $14 trillion, representing almost 100% of our Gross Domestic Product (national income from all sources). How do we fix this before the country tumbles into economic collapse? To most economists, the obvious solution is some combination of reducing spending (including benefits like Social Security, Medicare, and Medicaid), increasing taxes, and increasing inflation.

To most Americans, cable news shows, and even the President, however, the obvious solution seems to be “tax the rich.” A recent survey found that almost 60% of Americans oppose reducing entitlement programs but would rather raise taxes on “the rich” who need to pay their “fair share.”

The class war against “the rich” in the U.S. has reached a level I’ve never witnessed in my life. There was a time in U.S. history that accumulating wealth was seen as virtuous, a byproduct of hard work and the pillars of freedom upon which this country was founded. Not any more.

Let’s set aside for a moment the niggling fact that, even though marginal income tax rates fell for the top 1% of income earners over the past 30 years, their “fair share” of the total individual income tax revenue collected increased from 29% to 40%.

Instead, let’s concentrate on defining “the rich” so we know who the enemy is. A recent Facebook post by someone demanding we raise taxes on the rich defined “rich” as, “If your money works for you and you don’t work for it.”

Let’s look at some potential enemies in the war on the rich.

Holly, age 60, inherited $100 million from her parents. She draws $4 million a year in earnings, of which 50% goes to pay local, state, and federal taxes. She doesn’t hold a job, but spends most of her time championing a number of charities and globe-trotting. Certainly, her money works for her and she doesn’t work for it, so she qualifies as “the enemy.” Those wanting to tax the rich more would agree Holly should pay more, maybe 60%, 70%, or even 80% of her earnings in taxes.

Diane, age 50, owns a small business valued at $2 million. It earns $1 million a year and pays about half that in taxes. Diane lives on $90,000 a year and reinvests the balance in her business. Last year she was able to hire two new employees. Is Diane rich? Should we raise her taxes? If so, she will almost certainly cut back on business expenses and perhaps lay off employees.

Justin, age 35, is a corporate executive who earns $1 million a year. He pays about 50% of that in taxes. He lives lavishly, typically spending more than he makes. With no assets and $100,000 in credit card debt, Justin is basically insolvent. Is he rich? Should we raise his income taxes?

Mary is 75, widowed, and retired from the successful business she and her husband owned. Her net worth of $5 million from the sale of the business is invested in CD’s. They earn 1%, giving her a retirement income of $50,000. Certainly, Mary’s money works for her and she doesn’t work for it, so she qualifies as “the enemy.” Should we raise income taxes on Mary? If we do, we will be raising taxes on most of the people who want to tax the rich.

What do you think? Who are the enemies: Holly, Diane, Justin, or Mary? If there’s going to be a war against “the rich,” it’s important to identify the enemy.

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14 Responses to Defining the Enemy in the War on “The Rich”

  1. Dirac May 16, 2011 at 5:37 am #

    The other thing I need defined is ‘fair share’…the better earners pay almost all of the taxes yet receive or qualify for the least benefits. What is fair? Why am I supposed to contribute even more when I busted my butt in undergrad, worked and saved, and then worked through grad school? I now work 50-60 hours per week and yet I should pay my fair share to carry those who do not even try?

  2. Bobbie Munroe May 16, 2011 at 6:03 am #

    I think most people would agree that any solution is going to require cutting expenses (to include entitlements) and raising taxes. Returning tax rates to those in the Clinton years would not be onerous. Yes, higher income earners are paying more because there are more lower income workers (or unemployed) who can’t pay any income taxes. I’ll show you a budget for a couple with 2 kids earning 25K sometimes. But mostly it is a single mother trying to support those 2 kids on something like 17K. The gap between the haves and the have nots has spread enormously during those same 30 years. I fear that if nothing is done, the have nots will realize one day that there is no way for them to “win” so they will quit playing. Can you say French revolution? Also:
    1. I suspect Holly in your example wouldn’t mind higher tax rates. She is old enough to have seen the decline in her taxes and she probably understands that, for a stable society, she should pay more. Most of the people I know like her feel that way.
    2. I’m tired of hearing about job creaters. Leaving more money at the bottom has to be the best stimulus as all their income has to, not by choice, be spent for daily living and thus fuels the economy.
    3. We can sympathize with all of your examples. But what about the wall street guy who made the mess and walked away with a huge bonus? Him, I’d like to bury him not tax him more.
    4. Certainly you know that heads of companies used to make 40-50 times what line workers made and now that number has increased 10 fold. I can’t see any justification for this.

  3. Jerry May 16, 2011 at 7:04 am #

    Isn’t the issue of “taxing the rich” related to “federal taxes” on annual income, NOT assets or local taxes? So often these variables are intermixed to confuse the “federal issue”.

    Obviously, cutting spending is foremost! However, it seems reasonable that a temporary tax surcharge of, let’s say, 3% is appropriate on incomes over $1M for a fix time based on the simple theory of “have and have nots”. The proceeds should go directly to debt retirement…NOT to Congress for spending.

    Therefore, 1) Holly pays the additional temporary surcharge. 2) Diane could opt for straight corp status, pay corporate tax in lieu of personal tax, and retain earnings in company. 3) Justin will have to make wiser disposable choices before he meets his Maker! 4) Mary would not be affected as her “income” is only $50K.

    Income is the test, NOT assets!!!!! Jerry

  4. Rick Kahler May 16, 2011 at 7:17 am #

    Jerry,

    You point out exactly what I was trying to convey, most of the press and politicians confuse income with net worth. We deem someone to be “rich” if they have a high income. Most financial professionals define “rich” by net worth, not income, understanding that a person can make $10 million a year and spend every penny of it and be dead broke. Think professional athletes. It would be more accurate and understandable if the press and pundits would use the term “high income earners” rather than “rich.”

    As an aside, if Diane switches to a C-corp her taxes won’t go down but at best stay the same. In some states they may actually go up.

  5. Dave Jetson May 16, 2011 at 7:52 am #

    Focusing on who is rich requires much historical emotion in the response, which is a distraction from the deeper issues and solutions.

  6. Dick Wagner May 16, 2011 at 9:07 am #

    Rick,

    Thanks for shining the light on this. I bristle every time I read about taxing “the rich” when the author really means “high income.” It just grates on my ears as I think about pro athletes, entertainers, etc. who have one or two years of high income or physicians paying off student loans consumed in years when they paid no taxes. Plus, it is basically code for “make someone else pay” while avoiding the public conversations that must take place in the face of human and fiscal realities. Frankly, I am still marveling at the news that nearly 50% of adults pay no income taxes at all. Not to say that high earners are not blessed, just that it puts the emphasis on issues that go nowhere, rehashing old and tired tautologies. “Envy” is one of the seven deadly sins for good reasons.

    Keep up the good work.

    Dick Wagner

  7. Joanne May 16, 2011 at 11:26 am #

    I think the point here is that the average newspaper reader/computer news reader means, by “tax the rich” get those corporations who show millions in earnings; the corporations who pay little or no taxes because their accountants find every loophole, etc. When we average people read those stories and the ones about the executives who make millions in bonuses in addition to their bloated salaries, WE SCREAM TAX THE RICH. We totally forget about the mechanics of owning a business and maintaining its viability. We just want everyone to pay taxes, not just the little people.

  8. tim May 18, 2011 at 9:03 am #

    Just to stir the pot a little go to Vanityfair.com and read joseph stiglitz’ article “of the 1%,by the 1%,for the 1%.” Its a very interesting read.

  9. Bob N. May 23, 2011 at 2:17 am #

    The current tax code encourages “class warfare.” It is 70,000 pages of loopholes created by special interest group tax lobbyists. As long as it exists, the argument between who should pay more or less will NEVER be over.

    The FairTax (H.R. 25) would solve most of this. It would replace the income tax with a simple, fair and transparent national retail sales tax on new goods and services.

    Among many other benefits, it:
    – It is great for the poor and middle class (contrary to self-serving political criticism)
    – Rewards productivity and investment (rather than taxing it)
    – Would give our economy the jump start that it so desperately needs (in many ways)
    – Learn more about it at fairtax.org

  10. Don July 25, 2011 at 5:50 pm #

    Talking with my wife today about how politicians (and media, to some extent) love to paint millionaires with the same brush as private jet owners and Billionaires; reflected on how a Billion is 1000x a million; and how families earning $250k+ are often lumped in that same Billionaire/jet owner group.

    Says to me: “Can we buy a jet?” 🙂

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