Just when you have them in the cross-hairs, the target moves!
everyone out there making more than $250,000 a year is going to end up
subsidizing the rest of us who make less. Let’s pretend we can squeeze enough
out of you folks alone to pay off our federal debt – just as it’s necessary to
believe in Peter Pan if you want to visit Neverland. Most people whose income
falls short of that plateau think this would be just dandy. Except some of us
have some nagging doubts, and think that soaking the rich will work about as
well as appealing for voluntary contributions to balance our nation’s
I didn’t always think this way. I come from a working-class background, and in
my youth, harbored its typical mistrust and resentment of rich folks. In fact,
I still feel more at ease drinking beer in a neighborhood bar than sipping $12
martinis. (Confession: I’ve since acquired a taste for martinis, but mostly I
mix my own because it blows my mind to think of paying double-digit dollars for
any alcoholic beverage that doesn’t come in six packs.) Only because of service
in the U.S. Army and its GI Bill was I able to be the first in my family to
As a young liberal arts graduate, my working-class ethos was reinforced by the
socialist sympathies common to college professors and students then as now. I
pretty much bought into the dogma that the world we live in is unfair, the gap
between haves and have-nots way too wide, and the way to level the playing
field is for government to redistribute wealth through
Actually, I still believe the world is unfair and that it would make for a
better society if wealth were more evenly distributed. It’s just that I’ve
learned during more than three decades of covering the world of business and
economics that trying to achieve this utopia by soaking the rich makes for a
cure that ultimately worsens the disease.
I first started covering economics as a trade journalist in 1977. Those were
boom times for the construction industry and our economy in general. So much so
that one of the big issues I reported on back in the ’70s was widespread
material shortages. Factories couldn’t keep up with our overheated construction
markets. China was a Third World basket case just beginning to emerge from its
Maoist madness and not even a rumor on the global economic
Alas, trouble was brewing. Double-digit inflation was raging, and by the end of
the decade, interest rates were in the high teens. The economy went into a
tailspin, and these issues played a large role in the 1980 election of Ronald
Something else remains vivid in memory from that era. Federal tax policy was
skewed toward soaking the rich – even more so than today. When President Reagan
took office in 1981, the top marginal income tax rate was 70 percent. That’s
right; the IRS attempted to confiscate seven out of every ten bucks earned once
people reached the highest income plateau.
Note that word “attempted.” A stark reality was that almost nobody paid that
70-percent rate. Instead, a huge industry arose of lawyers and CPAs who
themselves climbed to the highest income bracket due to their skill in
exploiting tax loopholes. Hotels everywhere were booking tax shelter seminars.
Many extremely wealthy individuals renounced their American citizenship and
took up residence in one of numerous little Caribbean island nations that sprouted
up as tax havens and laid out the welcome mat for well-heeled
Go back further in time to the 1930s, and you’ll find that President Franklin
Roosevelt’s administration attempted to sop up more than 90 percent of income
above $200,000 (an enormous sum in those days). It helped stretch the Great
Depression out for more than a decade.
A lesson that never has been grasped by the soak-the-rich crowd is an economic
corollary to Newton’s Third Law of Motion – to every action, there is an equal
and opposite reaction. You can’t try to confiscate large portions of peoples’
money and expect those people to behave in the same manner. Just as you get
them in your crosshairs, they dodge away.
Fast forward to today. As sure as the sun rises in the east, as the bite
increases on taxpayers earning more than $250,000, they will seek out angles to
retain their money. They will finagle cash payments, increase 401(k)
contributions, invest in tax-free bonds, hang on to stocks rather than cash-in
capital gains, and plenty will just plain cheat. And/or, they will reduce the
amount of income they earn. Many productive citizens near the threshold will
decide it’s not worth working as hard for diminished returns, so two-income
families will trade down to one breadwinner, people will take more time off,
opt for early retirement and so on.
The soak-the-richers then will scratch their heads, wondering why tax revenues
are less than anticipated, and they will once again tap into the sacred creed
of their ideology – increase taxes some more. Only this time, tighten up all
Except the tax fanatics always are going to lose that battle. Here’s
Let’s give credit where it’s due: Our federal government employs some very
smart people. Hundreds of these very smart people in the Executive and
Legislative branches put their talents to work crafting ingenious tax laws and
regulations that seem to cover every possible contingency. Then the law gets
enacted and takes effect on the private sector.
There the document engages not hundreds, but hundreds of thousands of equally
smart lawyers and accountants who will probe for loopholes. When one inevitably
discovers something exploitable, that person will earn a lot of money spreading
the word via articles, books and seminars on how to avoid the new taxes. Tax
law writers are like a rural teacher’s college trying to compete in football
against USC or Texas.
Something else is worth recalling: The Reagan Administration slashed that top
tax rate from 70 percent to 28 percent, and it set the stage for a
quarter-century of the greatest prosperity in the history of mankind. The only
balanced federal budgets we’ve had in the last half-century occurred during the
Clinton Administration, driven not by high tax rates but by windfall tax
dollars generated by that prosperity.
The Reagan Administration was driven by the notion that lower tax rates result
in more spending and investment by people in the private sector, which grows
the economy and leads to more tax revenues. They called it “supply side”
economics. Its main apostle was economist Arthur Laffer, who pointed out in a
long-ago interview with me that although the supply side term was new, it was
nothing more than the same policy enacted by President John Kennedy to bring
the country out of a business slump that was occurring when he got elected. In
the article I wrote, Laffer cited several other historical examples of lower
tax rates leading to increases in government revenues.
Despite its track record of success, supply side economics always has been
treated with scorn by the soak-the-rich crowd, who have never figured out how
it works or even acknowledged that it does. Instead, they deride it as “trickle
down” economics in disgust at the fact that only a portion of the riches
accumulated by top earners reaches those at the bottom.
Thus, we are about to try for the umpteenth time to soak the rich in order to
pay the enormous bills run up by profligate spenders in both political parties.
That smacking sound you hear is that of little Caribbean
nations licking their chops.
Smart Business: Why It's All Wet to Soak the Rich
July 1, 2010