How Much More Can the Rich Pay?

July 23, 2008

I just read “Their Fair Share,” an article in yesterdays’s Wall Street Journal that details the amount of taxes paid by the rich. We have always known that the rich already pay far more than their fair share, but this article interestingly points out how the rich are paying more now than they ever have. The tax cuts implemented by George W. Bush (as he predicted) actually had the “reverse” effect on the taxes paid by the rich.

The top 1% of income earners made 22% of the money – yet they paid a whopping 40% of all taxes – nearly twice what some would consider their share. This was the highest share in at least the last 40 years.

The top 5% of income earners made 37% of the money – yet paid over 60% of the taxes into the treasury.

For those at the bottom, how much can taxes be actually cut? The bottom 50% of income earners in 2006, paid a record low 3% of the income tax bill. The reverse of that is that people with above average income (the top 50% – paid in 97% of all taxes.)

The entire notion that the George W. Bush tax cuts were a giveaway to the rich is a farce and in many cases – an out and out lie. Many politians and political pundits that argue this are simply showing their true ignorance of how taxes and the economy actually work. Unfortunately, a lot of other people do not understand it either which is why these people keep getting elected.

Consider the following facts from the article:
– No President in history has ever taxed the rich more than George W. Bush. His tax cuts worked precisly as he predicted.
– Millionaire households paid nearly twice the taxes in 2006, then they did before the 2003 tax cuts – $274 billion, instead of $136 billion.
– The increase tax payments from the rich pushed the budget deficit down to 1.9% of GDP in 2006, from 3.5% in 2003.

The two basic things people look at when considering investing in a startup or a new company is risk and return. How much risk is involved in this venture? What are the odds I will lose everything, lose a little, lose nothing versus what are the odds I will make a little or make a lot? Whenever taxes are lower, it increases the odds that someone will be profitable – and thus, the venture will be worthwhile. When taxes (particularly capital gains taxes), are higher, it increases the odds that someone will not seek the returns they are looking for on their investment. Thus, people invest less as tax rates increase. When people invest less, less jobs are created. When less jobs are created, unemployment goes up and well you see the picture. Basically, the economy begins to spiral downhill. Why? Higher taxes are bad for the economy and as years and years of evidence has shown – they almost always decrease revenues to the government.

The rich are not stupid. They got their for a reason. They are not going to invest without adequate hopes of returns. They are going to move their money from “taxable” investments to things with lower risk and lower tax consequences.

In closing, consider the following from the WSJ article:

“Mr. Obama proposes to close this deficit by raising tax rates on the rich to their highest levels since the late 1970s. The very groups like the Congressional Budget Office and Tax Policy Center that wrongly predicted that the 2003 investment tax cuts would cost about $1 trillion in lost revenue are now saying that repealing those tax cuts would gain similar amounts. We’ll wager it’d gain a lot less.

If Mr. Obama does succeed in raising tax rates on the rich, we’d also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them — the Carter years — the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.”

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.