In one of my very first economic classes the professor said, “U.S. government bonds are considered risk-free investments because of the governments’ unlimited taxing ability.” Even at my young age I considered that an arrogant statement, and one that if truly believed could lead to all kinds of political mischief.
Congress is currently considering the biggest tax increase since Ronald Reagan. The idea of raising taxes on rich individuals and corporations is gaining momentum. After all, who isn’t a big fan of wonderful government programs that someone else has to pay for? Adding fuel to the fire are leaked IRS documents revealing how very little some super wealthy individuals pay in federal taxes, with one of the richest men on earth actually claiming the child tax credit in a recent year. As this tax debate heats up, let me point out a few things that individuals and investors should keep in mind as a government “by the people and for the people” exercises its “unlimited taxing ability.”
Though Mitt Romney suffered politically for saying so, corporations really are just people. Every dime of corporate profit, or loss, filters down into the pockets of you, me or someone else. If you raise taxes on Exxon, Costco or Apple computer, those taxes reduce earnings to the millions of people who own their stock and increase costs for the hundreds of millions who buy their products. We must not pretend otherwise. The real question is, “when prices go up, who really gets hurt the most?”
“Tax the rich” is a great political slogan but when that translates into higher tax rates for average individuals, politicians are either missing the point, or just lying about their intentions. Billionaires pay relatively little in federal taxes because they have relatively little “taxable” income. Most of their wealth comes from assets like stocks and real estate that are not taxed unless they are sold. When a billionaire generously asks to be taxed more, they are most likely talking about their miniscule “official” salary, not their vast holdings. Apart from that it is estimated that billionaires only hold about 3.5% of Americas wealth. It just isn’t enough money to solve Washington’s spending problems. All politicians know this.
When Willie Sutton was asked why he robbed banks his reply was, “Because that’s where the money is.” The vast amount of our nations’ wealth is held by the middle class so a government that needs more money has no choice but to go after it where it is. My reason for bringing this up is because taxes can hurt people, and if you hurt the middle class, you hurt the economy.
As individuals trying to achieve the American dream, and as average investors hoping to get a reasonable return on our hard-earned dollars, and who depend on those retirement accounts growing, we should be very skeptical of higher taxes that are sold as “making the rich pay their fair share” when ultimately most of the cost will necessarily be borne by the rest of us.
