Wednesday, September 15, 2010

Will Obama Tax the Rich? I'm "All In" In On This Prediction

Of course. They are the villains, those rich pricks. They made all the money so make them pay the freight. Screw 'em. I read these deep comments all over the intertubes.

Unfortunately, taxing the rich is just a ploy to gain votes for the mid-term elections. It won't work anyway...I'll explain why in a minute.

There is one other huge dilemma with taxing the rich. Our entire capitalistic way of life is based on us NOT being equal. Taxing the rich takes all of the incentive for achieving success off of the table. Why would anyone work their asses off- just to lose it all to the government? The short answer is- they wouldn't and they won't.

Let me give you a poker game analogy. Let's suppose ten of us sit in a poker game. After playing a few hours, three of the players (the most patient and skilled players) have 2/3rds of all of the chips on the table. Seeing this as unfair, poker room personnel intervene and tell the good players to give back the chips they won from the crappy players. The good players have lost the incentive to play. The crappy players have lost any incentive to get better because they know the house (government) will intervene and give them their chips back.

Our entire American way of life was founded on the principle that hard work or innovation pays off. When you take that incentive away, you will get neither.

A few years back, I think it was South Carolina, which employed this very tactic. They raised taxes on the rich. Guess what happened? The rich left the state. The tax hikes failed and South Carolina received far less revenue than they had hoped for. Our poker room analogy is fitting here. If in the middle of the game, you decide to change the rules and give the crappy players their chips back, the good players who have those chips will say "fuck you, I am leaving the game and taking the chips with me."

And thus we have 55,000 American bank accounts in Switzerland at UBS alone. Thousands more in offshore places like the Cayman Islands. Why? Because government is desperately trying to get their hands on those chips. It's not the players who are evil- it's government.

The kicker? The rich don't have enough money to bail us out anyway. We currently owe 19 trillion. If you liquidated ALL of the assets of our top five billionaires (in the top ten worldwide) and delivered it to the US Government you would only pay off 200 billion of the national debt. This is about 2%. Big whoop. That won't even pay the interest on our debt for a year.

So what will Obama do? He is an idiot and therefore, he will try to tax the rich because it is the politically expedient thing to do. It will gain him a short lived political victory among the uneducated and huddled mass of voters this fall, voters who will see him as Robin Hood. Stealing all those rich pricks' money. What's not to like? In the long run, we will feel the damaging effects of encouraging socialism and supporting mediocrity. We will not gain anything but then again, we are dealing with a man that was raised in Indonesia who has a time horizon of two years. Why wouldn't he tax the rich?

He has to. That is Obama. His contempt for the rich and our American way of life should be fairly obvious to even the most casual observers. We know what his cards are. I'm all in on this bet.


Mark said...

"If you liquidated ALL of the assets of our top five billionaires (in the top ten worldwide) and delivered it to the US Government you would only pay off 200 billion of the national debt."

Soaking the rich would not involve liquidating the assets of five people. It would involve raising taxes on the 10% or 30 million Americans who control 80% of the country's financial wealth. But you knew that.

Brian said...

I agree Mark. I was just illustrating the futility of seizing the assets of the rich and throwing good money after bad.

Our interest on our debt will be 500 billion this year. That's 5 trillion in interest this decade. That's as long as low interest rates hold.

Mark said...

Yes but you did not illustrate the futility as you left out a whole bunch of rich folks.

The best number I can find for total household wealth is around $25T in 2004 (link below). Let's say it is unchanged for simplicity.

80% ($20T) of that is controlled by 30 million (not five) Americans -- we will call them "rich".

Let's say they earn on average 5% per year on these assets, or $1.0T per year.

$1.0T / 30 million comes to $33.3B per person per year in income, so yeah I'd say these are rich folks.

IF the Feds taxed this income on an emergency basis at 90% after the first million or so and IF the rich folks did not figure out how to avoid the tax, IRS could theoretically raise almost $900B per year, or $750B more than the 15% tax rate they presumably pay today.

Of course those are big IFs. More likely municipal bonds would suddenly become very popular and corporate executives would find ways to defer most of their compensation, which is probably good but does not do anything for federal revenues.

So you would have to figure out how to deal with these issues. Maybe dividend and capital gains taxes should be graduated with income. I don't know. But rich people certainly do have enough income to make a difference by raising their taxes. And the other 90% of us would not be directly affected.

Rich folks work really hard avoiding the fact that our "progressive" tax system is actually regressive at the top levels and has been for some time. I say if progressive is beneficial at six figures, it's just as beneficial at seven, eight, nine, etc. Warren Buffett agrees.

Overall effective tax rates should increase with income, no matter what. That is not what we have and this is not fair.

Brian said...


What isn't fair is anything that is not a flat tax. Period. That is the only fair playing field.

Please get this idea out of your head that as long as government can pick and choose who to tax and who not to tax...establishing arbitrary amounts here and there...that that is fair.

It isn't. One universal flat tax, get rid of mortgage deductions, watch the world change. Or continue this insane idea that if we just tax the rich, all of our troubles will be over. The rich are smart Mark-that's why they are rich. They will find ways to game any system and in the end...if you take away their money now...they will simply get it all back.

Why do you suppose the rich hate the flat tax and we've never been able to change it? Because they got the gold and the people with the gold make the rules. They can't game a level playing field politically.. their clout erodes and evaporates like a downpour in death valley.