FIRE Politics – Seize The Rich?

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I visited with a friend over a beer last week and we discussed a lot of things, including – inevitably – national politics.  As I wrote in my election day post about what the next President needs to do, I argued that the most important issue is government out of control spending.  Rein in the spending, and you rein in the government.

My friend argued that it wasn’t government spending that was the problem (in fact, like many politicians, he would propose even more) – it’s that the RICH do not pay their fair share of taxes.  This is a sentiment that you often hear on the cable news channels – the RICH have a sweetheart deal with government that means they pay less than they should.  If we could just get them to pay their fair share, we would have enough money for every priority.  Big business is often vilified by people in a similar way.

I reminded him of the Margaret Thatcher observation that ““The trouble with Socialism is that eventually you run out of other people’s money!” and decided I would put together some numbers to show how flimsy the often-repeated “soak the rich” call to action is if you put it into it’s most extreme practice.  Consider this …

1. If you passed a law nationalizing ALL of the wealth of ALL of America’s 537 billionaires, rendering them completely broke, you would collect $2.2 trillion (Hurun.net).

 And …

2. If you seized ALL of the income of EVERY other household above $200,000 by passing a 100% income tax as the highest tax rate, you would collect $2.1 trillion (IRS.gov).

And …

3. If you confiscated ALL of the income of EVERY one of the Fortune 500 companies, making them essentially into non-profit organizations, you would collect $0.8 trillion (Fortune.com).

Combined …

These three actions – effectively cutting the head off of every ‘demon capitalist’  would result in $5.1 trillion of new tax revenue going into the government coffers. 

Which …

Would cover less than NINE MONTHS of the $7.4 trillion in government spending that occurs annually (federal, state & local) – funding government to only about August 28th of the first year (usgovernmentspending.com).  

OBSERVATIONS

While it is fashionable in some circles to hate the rich and big business, this example shows that while there are more and more millionaires and billionaires in the USA than ever before – their great wealth is TINY compared to the incredible COST of running current government programs.

And, keep in mind that the current $20 trillion in federal debt is still UNTOUCHED by the actions in this extreme example.  It would take 100% of the income of EVERY other American for the next 3-5 years to ALMOST pay off that amount (IRS.gov).  And, all of this activity is predicated on the American economy continuing to perform as it has, despite a likely exodus of almost all of America’s wealthiest individuals and the companies they built.

Seizing the wealth of the rich will push America’s greatest innovators – and all of our major companies (which employ tens of millions of Americans) – out of the country and stop funding for any future innovations to occur.  The value of these innovations are exponentially more than what they themselves have acquired.  

In addition, they also pend their money on things – like luxury cars and houses – that support industries that tens of millions of other Americans are employed in.  And, the companies they built are collectively owned by all of us through the mutual funds, pensions, insurance plans, and universities we all benefit from.  

PROGRESSIVE TAXATION

While there are too few of them and too many of us to make the math work for our nation, it is also just plain intellectually dishonest to claim the “rich are not paying their fair share”.

The following chart compares income groups in the US (in the green) with their share of ALL taxes (federal income tax, payroll taxes, federal excise taxes, state income tax, state sales tax, property taxes, and other local taxes), and federal taxes alone. You can plainly see we have a progressive tax structure – the poorer pay a rate much less than their income, and the wealthy pay a rate much higher than their income.

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CONCLUSION

In conclusion, as a general rule, I try to keep this blog pretty politics-free, but I felt this story needed to be told.  In a personal finance blog, it is important to reflect on how macroeconomics impact our microeconomics.  This isn’t a partisan post – both major political parties have contributed mightily to the massive government spending and debt challenges we face.

As the example shows, there is no magic solution to suddenly solve our unsustainable national finances.  Seizing the rich won’t work, so we will all need to factor this thinking into the planning we do for our expected investment returns, estimated tax rates, and forecasted inflation.  All are impacted by our outsized government spending.

What has been your view of the “Tax the Rich” rhetoric?

Image Credit: Pixabay; Chart: CitizensForTaxJustice.org; Chart: Daily Signal.com

20 thoughts on “FIRE Politics – Seize The Rich?

  1. Two great takeaways: Seize the riches of the rich and there’d be very little impact on covering national spending. Seize the riches of the rich and eventually we’re left with no innovation in the U.S.

    Great insights!

    Liked by 1 person

  2. Control spending is #1. They really need to figure out ways to cut back. I don’t like how the more money is going to the military, though. Everything should be cut back.
    Also, I don’t think cutting taxes for the rich is going to help much. It will just increase the deficit and benefit the rich people. The current tax code is fine with me. Corporate probably should come down a bit.

    Liked by 1 person

    • I honestly agree with everyone of your points. The Republicans love to fund the military, the Democrats love to fund the social programs. The fact is, we can’t afford the spending we have on either!

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  3. Is it not always a balance? The government does need to get more efficient with spending to limit the deficit, no debate here. But you have to admit that it is rather unfair for the average American that they pay 30-40% taxes. Whereas most of the (super) rich get away with paying anything between 5-15% (as noted by amongst other Warren Buffet)?
    You probably could reduce some of the government deficit (outside any required optimizations) if the upper echelon of society actually become ethical (rather than follow the tax rules / loop holes) and starts to pay at least the same amount of taxes as the average John?
    This would not drive them out the country or hamper innovations (which by the way is primarily driven by the average American with a desire to make money or do good, not solely by the super rich!).
    Good post, thought provoking for sure 🙂

    Liked by 1 person

    • Warren Buffett has done more to confuse this issue than anyone in the country. He is a unique case in that he doesn’t pay himself ordinary income. Look at the chart and you’ll see that the the very rich – the top 1% – pay the very most. This isn’t a projected tax rate, this is actual taxes paid. Yes, people innovate for different reasons, but in this extreme example – why would anyone set up a company to bring an innovation to market?

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      • True, the 1% might actually pay the most, but they have the most wealth as well. Seems a rather logical distribution of the tax burden across society? Not?
        Apparently the 1% have 20% of the total income and 42% of the total US wealth: https://www.theatlantic.com/business/archive/2016/03/brookings-1-percent/473478/
        So from an income perspective they pay about the right amount of taxes. From a wealth perspective, they not really paying their fair share. Not judging here, just trying to get a feeling for the numbers.

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      • Wealth is quite a bit different than income, isn’t it? A great portion of it (savings) has already been taxed as income. The value of other wealth (real estate, stock) is only an estimate – it gets taxed as income/cap gains when its value becomes realized. Corporate investments are also subject to corporate income tax. Wealth is taxed again when someone passes away with estate taxes.

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      • Oh, we are well aware of the difference between income and wealth. As in this country (the Netherlands) we are taxed on both! For 2017 the government assumes you make anywhere between 2.75% and 5.5% on your wealth, which is then taxed at a nominal 30%. Trust me, it hurts! But you have to admit, smart idea of the government to get some tax income from the 1% (and those poor slobs that want to FIRE). Albeit they probably found a way to shield from this via corporations.

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      • Interesting article! It’s basically saying that the government is unwilling to increase tax revenue by means of legislation changes, thereby legally allowing people like Warren Buffett (via his company) to amass large amounts of wealth virtually tax free. Why am I not surprised 😉

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      • It is tax free so long as he doesn’t take it as income and chooses to give it away. Keep in mind that the wealth also has no benefit to him or his family in these circumstances.

        Like

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