Wealth and Tax Policy

I’d like to be rich; wouldn’t you?  I’d like to not have to worry about being able to pay my bills or being able to retire comfortably.  Yes, I’d like to be rich.  How can I make that happen?  As I see it there are three roads that could lead to becoming rich.  I could win the Lottery.  I could inherit the money from someone else.  I could chase the American Dream and build something of value.

“Winning the Lottery” is so American these days.  In today’s short-attention-span, instant-gratification society, the BIG Lottery win is the road of choice.  I have a friend who invests six dollars per week to the Mega-Power-Million-Balls game.  He’s not so naïve as to think it’s an investment in his future.  He just understands that it’s the only game of chance where he can keep his emotions under control and thus manage to keep his losses within his budget.  It’s his one vice and it’s entertaining.  Besides, someday he might just “win the Lottery”.

Inheriting a lot of money is kind of like “winning the Lottery” but the gamble is won early by being born to the right benefactors and then waiting it out until they don’t need their money any more.  If that’s who you are, you can probably stop reading, you’re already set.  That is unless you were expecting a big gift from Bill Gates or Warren Buffett.  Warren Buffett’s view in passing inheritances along is “give them enough that they can do something but not enough that they can do nothing”.  Furthermore, Buffett and Gates are embarking on a campaign to severely restrict these rights of passage by working now to make sure that their fortunes and those of other super-rich are bequeathed to causes rather than just people.  It might not pay to win the race of the gene-pool in the future.

There is always the American Dream.  It’s the promise that anyone can grow up to be President or Bill Gates for that matter.  All you have to do is decide what you want to do, work hard, and grow your dream.  Everyone agrees that this is the economic engine that makes America great because this is where the majority of our jobs are created.  People who are building dreams get to the point where their dream is getting big and they need help keeping it going and growing and they hire other people to help.  People invest in their dreams when they see their dreams about to come true.  Unfortunately, the President wants to take their means of doing so.

Now we must consider tax policy.  The Bush-era tax cuts are about to expire and the only impediment to renewing them is disagreement over how to treat people who make over $250,000 a year.  This group starts with liberal academics, trial lawyers, and those people who have a dream starting to build into something great.  It then goes on up to those who have already made it.  Then it goes up to Bill Gates and Warren Buffett.  The only group that really should invoke any sympathy is the dreamers and I don’t mean the academics.  We need to figure out how to keep the government from stifling the economic engine that grows small business.  The others can pay since they are not as active in the building process.

Businesses pay taxes using one of two structures.  Most large businesses are corporations that are organized as free-standing entities.  They pay their own taxes on their profits and pay their investors the excess after-tax profits through dividends. These dividends are taxed also.  This double taxation of profits is not a serious concern for very large corporations but it is disadvantageous to small businesses so they generally choose the other structure, called a pass-through, which only taxes profits once. The problem is, those profits are added to the owners’ incomes and taxed whether they are taken out of the business or not.  This robs the business of the capital it could use to expand.  This is why including the dreamers in the high tax bracket of the current tax law is a bad idea.

I think it’s right for people to pay their own way and to pay the taxes they owe.  But I think we ought to figure out how to help those people who by providing jobs are helping other people pay their way.  Perhaps the argument shouldn’t be whether we should be taxing the rich or not; but rather, whether we should be taxing business or not.  Perhaps we should be discussing the tax on dividends rather than the tax on profits wrongly defined as pass-through income.  It should be OK to tax income but not OK to tax capital.

Per the status quo in Washington, the discussion/argument will be about rich versus poor.  Perhaps we should change it to be about the ability to produce wealth and do everything we can to re-enable the American Dream and let the dreamers pull us out of this economic malaise we’re in.  No one ever got a job from a poor man.