The United States has a serious problem with debt. As a nation, we are in a similar situation to a family who spends more than is received and is maxed out on all credit cards. The general response in that case is for the adult family members to increase the family revenue either by getting second or third jobs, or by changing to a higher paying job.
The government does not have the luxury of taking a second job, nor can it find an employer who will pay higher wages. To increase revenue, it can only increase fees and taxes. Given the current state of the economy, it is unthinkable to raise taxes on the poor, and even middle class families would be put under stress by any tax increase.
“Ah ha,” says the president. “Let’s raise taxes on the rich. They can afford to pay more and Warren Buffet even says he is willing to pay more.” Well said, Mr. President. If anyone can afford a tax increase, it is the wealthy, and there are probably a number of wealthy people, in addition to Warren, would be willing to pay more to help the country out of the debt mess.
Mr. President, please use some caution in any adjustments you make to the tax system. There are a number of pitfalls to avoid.
Wealthy is a relative term. How will the IRS define who is wealthy enough to pay the additional taxes? Some taxpayers may appear rich because they are sole proprietors or partners who run the profits of their business through their individual income tax report. Such taxpayers are not the same as a taxpayer drawing interest and dividends on investments of “old money.” Sole proprietors and partners are also significantly different from the financial giants and corporate officers who draw large salaries and bonuses. Will the new tax code take these differences into account? Please take care that you do not accidentally kick a struggling businessman in the shins just because he shows a large number on some line in his 1040.
While some increased taxes on wealthy people may be acquired without damage to the economy, recognize that significant increases in taxes will discourage “rich” people from investing in business. Thus too large a tax increase on the rich would hurt the very economy the president is trying to expand. I am reminded about the story of Jack Benny back in the days when the highest tax bracket was 90%. A neighbor saw Jack on a ladder cleaning out his gutters. The neighbor expressed surprise. Jack could afford to hire a handyman to do the job. Jack replied, “If I pay a young man $10 to do this job, I will have to earn $100 in order to pay him, and for $100 I can clean my own gutters.”
Some taxpayers will view tax increases as class warfare and get angry. Angry taxpayers are thus motivated to look for tax shelters and tax loopholes. If you get enough taxpayers angry, you may find a net decrease in revenues.
Another factor is the limited number of wealthy taxpayers. The reason why the rich pay such small portion of the total government revenue is not due to tax rates or tax breaks. Us poor folk vastly outnumber the wealthy. Even if the tax rate on the rich were increased to 100%, the increase in revenue would be modest. Thus, Mr. President, you are advised not to expect any tax increase on the wealthy to solve the deficit problem.
The most important warning is to stay clear of accounting tricks. Do not think we can increase our deficit budget just because we are using increased tax revenue to pay off part of the debt. In order to decrease our national debt, we must first balance the budget. Likewise, do not balance increased current spending with spending cuts several years out. Our problem is not one of bookkeeping but a problem of spending being in excess of revenue.
Were I rich, I would probably not complain too much about modest tax increases because I would be able to afford them, but please use caution setting tax rates. Just because some of the wealthy taxpayers are willing to pay more, does not mean it will be good for the economy. Use extreme caution.
(Note: the author and his wife are retired and comfortably living on a modest and balanced budget. We are not rich, but we have no debt. Thus no loan payments draining our bank account. Over the years, we have accumulated a few investments that supplement the social security checks and small teacher’s pension we receive, but little of the investment income is used for current expenses. Our secret is one I am glad to share with the government. Spend less than you take in.)