Thursday, February 26, 2009

The Rich Just Won't Pay

President Obama has said that he is going to make up for the massive budget deficits by raising the taxes on the folks making over $250,000 per year. Tonight I heard the White House budget director staunchly stick up for the plan and aver that it will bring down the budget shortfalls.

No it won't.

The reason is that the very wealthy, the folks making over $250,000 a year, have an amazing degree of flexibility in their income. THE WEALTHIEST 5% OF AMERICANS ARE ALREADY RICH!! THEY DON'T HAVE TO GENERATE INCOME IN ORDER TO STAY RICH. You see, in the USA we tax income, we don't tax wealth. "Income" (what you earn) and "wealth" (what you already have) are two very different things. We don't tax Bill Gates on his multi-billion dollar fortune. We tax his income which is considerably less. Indeed, Bill Gates and many others have an amazing ability to reduce their annual income to zero via a lot of fancy legal shenanigans. If Obama's plan goes into effect, you'll see some of the wealthiest folks in the country suddenly making less than $250K per year. I can't believe that Obama's economics team seem to be blindly assuming that the very wealthy are going to sit on their hands and pay the tax increase. They won't. The majority of folks in that category will use every legal means available to reduce their annual income to a level that avoids a tax increase. As I said, those folks are already rich, they don't NEED to create additional income like you or I have to do. Yet, it appears that Obama believes that the very rich are going to just blindly pony up the additional percentages.

Remember when Bill Clinton put a big tax on luxury items such as furs and yachts? The yacht building business in the US, which is not a small industry, just tanked. Thousands were put out of work. The repercussions cut through the industrial panorama in this country as orders for engines, steel, electronics, etc. dried up. Foreign yacht builders saw a huge increase in their business and you also saw a lot of US yachts suddenly home-ported in places such as the Grand Caymans, Mexico, and the Canary Islands. Folks who made their living maintaining and repairing yachts suddenly were out of jobs. It didn't just affect the yacht building industry. We are already seeing the same thing happen to the private jet business. Those jets require a ton of maintenance. It isn't just the pilots. Their are mechanics, too. Lots of them. Suddenly there are a lot of those guys looking for work. The same goes for pilots and cabin attendants.

So, we could be seeing a pretty nasty convergence of forces in the coming days and months. By raising capital gains tax rates you will cut off a lot of home purchases and other investments as folks just hold onto investments rather than expose them to increased taxation. Add that to a financial slowdown among the wealthiest people as they cut back or simply don't create income because of the bigger hit, and suddenly you are going to see a lot of folks hurtin' for certain.

And it won't be the wealthy.

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