Politics & Policy

Stick It to the Fat Cats . . .

. . . not the entrepreneurs.

‘A New Direction for America,” a political perspective courtesy of Nancy Pelosi, is focused on making life more affordable for all Americans. Biting their lips right through Election Day, the redistributionist Left was quick to jump on the bandwagon of getting the “rich” to pick up the tab for Pelosi’s affordability platform. John Edwards, losing vice-presidential candidate in 2004, proclaimed: raise taxes on the rich. And an editorial in the Wall Street Journal by Roger Altman and Alan Blinder concluded, “in recent decades the fruits of economic growth have not been widely shared … the middle class [deserve] a fairer shake.”

 

With proposals to raise the cap on Social Security taxes and lift the maximum personal income-tax rate to Bill Clinton’s 39 percent, the redistributionists are intent on reducing the take-home pay of the “rich.” Even though high-income individuals are paying a lot more in taxes than they did back when Jimmy Carter’s maximum personal income-tax rate was 70 percent, the liberal Left has failed to learn the lesson of the luxury-boat tax catastrophe.

 

Back in the early 1990s, when Democrats pushed through a big tax on luxury items — specifically the yacht market — the rich stopped buying boats and 120,000 middle-class American boat builders lost their jobs. The Democrats erred in that the tax fell on discretionary spending, which meant that the rich could postpone the paying of such a tax by not buying yachts. But what was interesting about the luxury-tax strategy was that redistributionists were willing to tax people on their wealth, not their income.

 

Ben Stein, the political and investment commentator, zeroed in on the present-day liberal tax mantra in a recent editorial in the New York Times: “Put simply, the rich pay a lot of taxes as a total percentage of taxes collected, but they don’t pay a lot of taxes as a percentage of what they can afford to pay, or as a percent of what the government needs to close the deficit gap.”

 

Stein went on to quote from a study done by the ultimate rich man, Warren Buffett:

Mr. Buffett compiled a data sheet of the men and women who work in his office. He had each of them make a fraction; the numerator was how much they paid in federal income tax and in payroll taxes for Social Security and Medicare, and the denominator was their taxable income. The people in his office were mostly secretaries and clerks, though not all. It turned out that Mr. Buffett, with immense income from dividends and capital gains, paid far, far less as a fraction of his income than the secretaries or clerks in his office. As a result, Buffett asks: “How can this be fair?” or “How can this be right?”

Stein’s perspective is important — it’s that taxes should be based on affordability. Is he right?

 

Well, it’s first important to understand that the redistributionists simplistically divide America into two groups: the rich and everybody else. But there are at least two subdivisions of that “everybody else.” There’s the segment of the population that works hard because they want to enjoy the fruits of their labors — they are interested in the acquisition of wealth. Then there’s the balance of workers who don’t desire to work hard and acquire wealth.

 

For the “work-hard” class, higher taxes on income are a major barrier to acquiring wealth. For entrepreneurs who have their own small businesses and must pay both sides of the Social Security tax before any calculations of profit or loss, an increase in the cap on Social Security taxes would be devastating. Ditto for an increase in the minimum wage or personal tax rate. Meanwhile, after paying taxes on income to the federal, state and, sometimes local governments, these entrepreneurs are hard pressed to build their fortunes.

 

So, if the redistributionists are so intent on raising revenues, why not tax wealth instead of income? While guys like Buffett complain that they aren’t paying enough income tax, they pay virtually no taxes on their wealth. As a matter of fact, the elite crowd easily dodges income-tax payments by giving money to charity. While I don’t have insight into Warren Buffett’s financial statements, his recent gift of $30 billion to the Gates Foundation could have a significant impact on reducing his taxable income. Since Ben Stein intimated that Buffett “doesn’t use any tax planning at all,” maybe he didn’t take the tax deduction. However, his $30 billion will escape the estate-tax man when he passes. The same is true for multi-billionaire Bill Gates of Microsoft.

 

There are many billionaires and multi-millionaires who could easily afford to cough up 1 or 2 percent of their wealth to pay a wealth tax. There are many institutions such as the Harvard and Ford foundations that have billions of dollars and pay zero taxes, even though they could afford to pay something to sustain the American way. Why are none of the redistributionists calling for a tax on institutions that have plenty of wealth — groups that can easily afford it?

 

If this suggestion seems a little too radical, here’s an idea that may be more palatable. Since it is now obvious that President Bush’s plan to eliminate the estate tax will bite the dust in a Democrat Congress, why not pass legislation that will allow all these fat cats (those who can afford to pay) to make tax payments now on their total estates in order to reduce the tax on those estates at death? For example, pay me 30 percent now or 55 percent later. Or how about limiting the deductibility of charitable donations over $10 million so that taxes must be paid on mega-wealth transfers to charitable institutions?

 

The reason why Democrats would never endorse such a wealth tax is that many of their supporters, like Buffett and Gates, already made their fortunes and have little interest in dissipating those fortunes by paying taxes. Maybe the fat cats don’t want to see the kids of any more nouveau riche entrepreneurs going to school with their own kids. They would rather see income taxed at higher levels, specifically the income of those risk-taking entrepreneurs who make this country great.

 

When Congress reconvenes in January, let’s see how fast it will move to implement the Left’s recommendations to raise taxes. If affordability is the benchmark, then let’s see a tax on wealth, not income.

 

– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc., and principal of Victoria Capital Management, Inc.

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