Did you ever wonder why George Soros (the billionaire who is doing all he can to defeat George Bush), Warren Buffett (the billionaire from Omaha who continues to argue for the repeal of tax cuts), John Kerry (the candidate for president who married into the billion-dollar Heinz fortune), and innumerable wealthy Hollywood celebrities all support the Democratic party — hook, line, and sinker? It doesn’t seem to make sense. Why would these patricians favor the party that wants to increase tax rates (as Kerry would do by repealing the Bush tax cuts)? Here’s one explanation.
They may act like philanthropists, but in actuality these Democrats are fat cats who can either avoid taxes entirely or pay just a minimal amount. They surely don’t pay their fair share relative to their wealth. These megabuck corporate elites take minimal salaries and then benefit from tax-sheltered windfalls when their company stock prices go up. In addition they create huge foundations that provide tax deductions which can offset much of their taxable income. Ongoing contributions to these foundations can materially reduce income taxes for an indefinite period of time. So the guys at the top — whether they are billionaires by inheritance, luck, or hard work — have amassed enormous fortunes that grow, and at the same time they use their assets to keep their income taxes low. Legions of tax accountants and lawyers make sure they take advantage of every tax loophole.
On the other hand, the few who get paid enormous salaries, like Richard Grasso, ex-head of the New York Stock Exchange, are beaten up in the press for being greedy. After federal, state, and local taxes, Grasso will keep about half of his much-discussed $140 million bonus. The government will take the other half. But that doesn’t satisfy the Democrats. They want even more. If the estate-tax elimination is blocked from becoming permanent, as Democrats hope, the federal government will take another half (or more) of Grasso’s money when he dies. To me, taking 75 percent of someone’s earned income sounds a lot more like confiscation than taxation.
Here’s the game the Democrats are playing: To avoid increasing taxes on their big-time constituents they are advocating higher income taxes on working Americans. And with the money they raise by taxing hard-earned dollars they plan to either shrink the budget deficit or fund their pet spending projects.
The reality is, higher income-tax rates discourage work and lower standards of living; they dishearten the entrepreneurs in our society who are trying to improve their own standards of living and the situations of their families. Bush understands this. Rather than rewarding the rich, his tax-rate cuts increase the reward for work.
This is not a partisan issue; it is economic reality. President Kennedy, a Democrat, cut the highest marginal tax rate from 92 percent to 70 percent. He said that cutting tax rates raised all boats — inferring that a reduction in tax rates helps everybody. The stock market boomed as a result. In 1969, Nixon, a Republican, pushed marginal tax rates back up to 77 percent with his so-called income-tax surcharge. After peaking in 1969, the stock market was cut in half within five years. (Today, the Republican party still counts a few Nixonian tax increasers among its members. Fortunately they are in the minority.)
Entrepreneurs who form their own companies have to pay both payroll and income taxes. That’s a big cost for newly formed companies as the taxes come right off the top (whether or not there is net income). If the Democrats have their way, the marginal tax rate on many tax-paying Americans could be back over 50 percent next year. Will this help the economy? Will such a tax increase create or destroy jobs? Does voting America really want to find out?
If the Democrats are serious about fighting for the little guy, but need a tax-raising offset, why don’t they promote a 1 percent wealth tax on all fat cats with more than $1 billion of net worth. They surely won’t miss it — a measly $10 million on each $1 billion. Meanwhile the tax revenues from this wealth tax could be used to offset a reduction in the payroll tax, so the little guy can benefit.
Of course, John Kerry, fat cat from Massachusetts, is unlikely to endorse any true tax on the rich. He only wants to raise taxes on the wannabe’s — people like you and me.
– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.