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Why soaking the rich doesn't work
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AP Photo/Damian Dovarganes
The current path of our federal government's budget could lead you to two possible longer term resolutions. One is that hyper-inflation will bring the government's balance sheet back in line by devaluing the outstanding debt. Another is substantially higher taxes fill the spending to revenue gap.
Who will be taxed? Not the middle class. That would be political suicide. The wealthy are the natural target. It sounds good. They've got the money. They'll never miss it. But, reality doesn't always cooperate with the plan on paper.
Let's suppose I'm a rich guy. I make widgets. I don't make widgets because I need the money. I could retire now and live very well for the rest of my life. I make widgets because making mountains of money is something I enjoy and happen to have a knack for. I've decided that if I'm going to go to the trouble of making widgets, I want at least a 50% mark-up. Widgets cost me $20 to manufacture, so I sell them for $30 right? Wait, there's taxes. If my tax rate is 25% I have to make about $13.35 to clear $10, so my price is $33.35.
Now my tax rate is raised to 50%. Now I have to make $20 to clear $10, so guess what? Widgets just went up to $40. Fewer people may buy at that price, but remember, I don't need the money. I set the terms for the kind of return I want. I cut production and employees and simply make fewer widgets at a higher price.
On paper you're taxing my income. In reality, you're still paying the bill, no matter how low your tax rate is. Bigger government will always cost you more. There are ways to make it difficult to track, but the buck always comes from you.
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