Why Taxing the Rich Doesn’t Work

Countable CEO Bart Myers shares his perspective on taxing the rich:

Words matter. They matter now more than ever. Our politicians need to stop making promises they can’t keep or don’t even understand.

It drives me nuts when I read about politicians talking about a 70% (or even 90%) tax rate, telling us that raising the marginal federal tax rate would pay for everything they want to do, from "Medicare for All" to walls to green new deals.

It doesn’t work that way. 

The rich don’t pay taxes.

Not like you do.

The marginal tax rate

The marginal tax rate is how most people (and companies) pay taxes.

This is where you add up your income, subtract some deductions, and figure out how much you owe—12% is the lowest bracket and 37% is the highest (for income of $500k +).

Increasing the marginal tax rate to 70% would impact businesses most heavily. To maintain their profits, companies would either push the higher tax rate on to their customers in the form of higher costs, lay off workers, or hold back wage increases.

In fact, this is why the recent tax break that Congress passed and the president signed was such a boon for companies: it reduced their effective tax rate while also increasing their profits. This led to record stock buybacks—though, oddly, not significant increases in wages.

But rich people, if they’re doing it right, don’t earn “income” in the same way that the rest of us do.

Wait, what?

That’s right. Most rich people put their money to work. They earn income based on the performance of their investments.

Capital gains

When an investment pays out in some way, it's called a capital gain—not income.

Aren’t capital gains taxed?

Yes, but at a far lower rate (ranging from 0% to 20%) based on how much you make.

Estate tax

The other way the rich pay taxes is through the estate tax.

The estate tax is also known as the “death tax,” as it’s levied on what an individual passes on after their death. The marginal estate tax rate is currently set at 40%, but the effective tax rate is 16.5% (and that only applies to estates worth more than $11 million).

If you want the rich to pay more (“their fair share”), you need to tax their wealth directly, restructure capital gains, or come up with an entirely new tax system.

The Buffet Rule

One idea that’s been receiving attention since its 2011 introduction is the “Buffett Rule.” Named after American investor Warren Buffett, the rule would basically double the capital gains tax to 30% for millionaires.

The Buffett Rule contends that under a fair tax system, all Americans would pay the same percentage of their income in taxes. But it says the tax system is not fair because it puts a greater proportional tax burden on wages than it does on investment income. The middle class shoulder this burden because their income primarily consists of wages subjected to income, payroll, and other federal taxes. In contrast, upper-class income consists primarily of investment-income taxed at preferential capital gains rates.

The Buffett Rule blames tax-code bias for an unfair tax system that forces many middle-class workers to pay a larger proportion of their income in taxes than the wealthy do. The rule seeks to remedy the bias by requiring millionaires to pay at least 30% of their post-charitable contribution income in taxes.

Why not start today?

Raising taxes on the wealthy is easier said than done. Our tax system has been rigged by special interests over decades. Any change, to any part, can spark a cascade of unintended consequences to home ownership, entrepreneurship, corporate investment, farming subsidies—even renewable vehicle sales.

The next time a candidate for office starts talking about taxing the rich and high marginal tax rates, ask them for specifics, what it would do, and how to hold them accountable. Only then can we have liberty and justice for all, regardless of tax bracket.

—Bart Myers

Bart Myers is the founder and CEO of Countable

(Photo Credit: iStockphoto.com / martince2)