ESSAY
Taxing the Rich
This election year, we're already hearing a lot about "giving tax breaks to the wealthy" or "making the rich pay their fair share." This drives me nuts. The rich won't ever "pay their fair share" under our current tax system. That's because we don't tax "richness" (aka wealth) in our tax system. We tax income. When you tax income, you don't tax the rich, you tax people trying to become rich. Just because somebody makes a lot of money in one year does not make them rich. Ask anyone who works in Hollywood.
So why don’t we tax the rich? Two reasons. First, being rich means that you already have a lot of money (for example: those who have net worth in the millions, hundreds of millions, or billions). And if you already have this kind of money, you don’t need to add to it by having a high income. You can add to your wealth by other means, such as capital gains on investments that are taxed at a lower rate than income (Mitt Romney is now taking heat for this). Second, rich people can afford expensive and creative accounting firms to help them hide their income in various ways that are unavailable to most people -- trust accounts are one example (ask the Kennedy family about this).
"We don't pay taxes. Only the little people pay taxes"
Leona Helmsley, 1983
The late Leona Helmsley, co-owner with her husband Harry of the Helmsley Palace hotels (and a net worth over $1 billion), had it right. The only reason she eventually went to prison for tax evasion was because she didn't keep her mouth shut.
So, under our current tax system, the actual rich hide their incomes, and most of them do it legally. But, rather than deal with this situation, as a “solution” to our budget woes, we hear a lot from politicians about taxing “rich” people with incomes over $200,000. This, to me, is one of the biggest untruths our politicians deal in (putting it politely). Just because you have a high income doesn't mean you're automatically rich, it just means that you’re trying to become rich by being productive. And it's pretty hard to become rich when the government takes so much of your income away. For example, if you earn $200,000 a year (which some people call "the rich") and pay half of it in taxes (federal, state, local, etc.), it would take you 5,000 years (presuming you had no living expenses) to become as rich as John Kerry became by marrying Teresa Heinz.
So, who do we tax when we tax income? Non-rich folks like you and me. And since there are a lot more of us than there are of them, this is where the government gets its tax revenue. Do you think rich people want this situation to change? Of course not. That’s why they give their campaign contributions to politicians who make claims of taxing the rich, when they do nothing of the sort.
If we really wanted to tax the rich in this country, we'd have to change our present tax system from an Income Tax to a Net Worth Tax: which is, to me (unless I hear differently) a good idea. Then you'd pay taxes, not according to how much you EARN (how much income you make), but according to how much you HAVE (how rich you are). The bigger your piece of the American Pie, the more you pay. Every year, instead of figuring out, or having your accountant figure out your net income (gross income less deductable expenses) you’d figure out your net worth. Net worth is the value of what you own (property, businesses, stocks, bonds, cash, cars, antiques, etc.) less what you owe on them.
Figuring out your net worth is way more fun and takes a lot less time than wasting all those hours figuring out every last expense you can deduct against your income. Under a Net Worth tax system (aka a Wealth tax), you figure out your net worth, and you’d pay a percentage of that. How much of a percentage? I don’t know, maybe 2 – 5%, maybe more. We could set a minimum net worth, below which nobody has to pay any taxes. But we could start by having every taxpayer (and yes, this would include foreign nationals who own a piece of the USA) figure out their net worth next April 15th and send it along with their income tax returns.
Same with corporations, and in this way we’d avoid billion dollar companies like GE paying nothing in taxes (corporations can't hide their net worth on balance sheets, if they had a negative net worth, nobody would invest in them). Then, we’d simply figure how much tax revenue we need to run the government (assuming we can control spending, but that’s another story…) and decide what percentage of the total national net worth we need. Tax compliance would be easier too. While genuinely rich people can hide income, it's a lot harder to hide mansions, corporations or yachts.
OK, if you think I’m nuts, tell me why this won’t work. And why am I the only one talking about it? Probably because I’m not rich, but I am certainly taxed. 04.28.12
