Monday, February 22, 2010

Why tax the rich doesn't work

Below is a quote from, by tomgee. Because it is burried deep in the comments section, I can't just provide a link else you will be lost. So the full copy is provided:

I was amused to see an interview of a laid off worker–from a plant that made $300,000 RV’s. Wanted to blame the rich and “soak them”. Guess he didn’t realize that middle class people don’t buy many $300,000 RV’s and that the “rich” weren’t buying them because they were hurting too. If we take every cent from the “top 5%” it won’t help our weak economy–it would crash it. The “rich” pretty much have their money available to stimulate the economy–and where it is most needed. If they spend it on expanding or maintaining their business–100% efficient stimulus. If they put it in the bank where others can borrow it–100% efficient stimulus. If they buy U.S. stocks or bonds (local, state, federal corporate)–100% efficient stimulus. If you get after them with more taxes you will do two things: (1) you will make them move money based on tax implications instead of wise investing–and wise investing tends to get the money to the right places. (2) the money you take from them in taxes goes into the inefficient government system where much of it is wasted (3) you may make them reduce investments (I.e. bury some money where it does no good at all) since the natural tendency is to spend and invest that in excess of you needs—and spending and investment is what stimulus is about. If you threaten a future of higher taxes–they will cash out their investments now and pay taxes at the current lower rate. That “selling spree” is the exact opposite of stimulus–and they will move the money somewhere where the taxes won’t be as bad–but that might not be as beneficial for the economy. The problem right now is not that the rich have too much pie–because if we spread it all around equally no one wouldn’t be happy with their slice. Our problem is jobs–there are not enough to go around. The problem is that we need to make more pie. And the government can’t make anything–businesses and entrepreneurs make things–and these tend to be “rich people” or people that end up there if they are successful. People that make a wage tend to not understand that the same business that makes $500K this year can often lose that much the next–and if the business is taxed out of their profits in good years they can’t survive the bad or expand even if there is reason to. It might take $10 million in “at risk” investment to grow a business by 20 employees and $500,000 profitability (a 5% return). The business would need about $2.5 million to go to the bank and get the loan for the $10 million–Which means they have to be able to keep some of their profits at some point. And if you cut their profits in ½ with additional taxes it will take them twice as long to accumulate the capital to expand–or you might even make it where it isn’t worth doing. And you make them increase the price of what they produce (which the “poor” then buy) to try to make the math work. This is why redistribution doesn’t work–you eventually divide less and less.

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