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Despite the breathless post-election
"think pieces" that have drawn sweeping and deeply considered
conclusions about the political drift of the country, at its core President
Obama's re-election is easy to understand. He essentially promised millions
of middle and working class voters that if he were to be re-elected, they
would receive benefits paid for by the rich. You don't need to read a Time
Magazine cover story to untangle this political strategy. Now that he has
been given a second term, Obama needs to deliver the goods by raising taxes
on the rich and only the rich. He will be "asking" them to pay
their "fair share," (as if "asking" and
"fairness" have anything to do with it). In reality the wealthy
already pay taxes at a much higher rate than average Americans and in many
cases will now have to pay more than half of their income in federal, state,
and local taxes.
While most people would assume that the wealthy would chafe at such a heavy
burden, some affluent individuals have apparently organized spontaneously to
express their willingness to help the country. In interviews and articles,
these self described "Patriotic
Millionaires" have implored Congress and the President to raise their
taxes. They claim they can easily afford to pay a little more to save the
nation from fiscal insolvency.
Conservative economists believe that an economy is most vibrant when as much
money as possible is left in the private sector where it can be used for
business investment and job growth. Left wing economists believe that
government spending, which they term "investment," does more good.
Through this lens, it's tempting to see the Patriotic Millionaires as well meaning Americans who have simply subscribed to a
misguided economic philosophy. However, the reality may be far more sinister.
Daniel Berger, a spokesperson for the group, joined me last week on my radio
show. Based on that highly charged and polarized discussion, it would be
logical to conclude that the group is simply comprised of Democrat shills
masquerading as patriots. Time and again Mr. Berger regurgitated Democratic
talking points without the slightest ability to critically analyze his own
positions. His goal was to simply create the impression that paying high
taxes is patriotic. His hypocrisy was not hard to uncover.
He admitted on the show that he used an accountant to prepare his own taxes
primarily to ensure that all the forms were filled out properly. Mr. Berger
is a highly successful attorney purportedly earning over one million dollars
per year. But apparently even that level of expertise does not qualify him to
confidently fill out a 1040. Of course, the real reason he hires an
accountant is to minimize his taxes. He, like every other American with an
ounce of honesty, wants to make sure that he pays as little tax as the law
allows. He hires an accountant to make sure no deductions or loopholes go
unexploited. Under normal circumstances, there would be nothing wrong with
that. But when you publicly claim that it's your patriotic duty to pay more
taxes, it's hypocritical to simultaneous pay an accountant to make sure that
you actually pay as little tax as legally permissible!
He revealed to me that it wasn't so much his own taxes that concerned him but
other millionaires that he is convinced unfairly pay a lower rate than he
does. As a lawyer, his income comes in the form of fees. Therefore he pays
most of his federal taxes at the 35% rate (plus Medicare). However he seemed
disturbed that other millionaires, who may rely on dividends and capital
gains for much of their income, pay only 15%. When I explained that corporate
stockholders have already paid a 35% tax on their share of corporate income
before they received any personal dividends or capital gains, he claimed that
corporate income taxes have no impact on either dividends or share prices.
Really?
I suppose being a high powered lawyer and tax-loving patriot doesn't
necessarily involve a basic understanding of finance or accounting. A
corporation's stock price and its ability to pay dividends are a function of
its after-tax earnings. The higher the tax rate, the less the company is
worth and the lower the dividend it can pay. So gains and dividends have
already been significantly diminished by corporate taxes before the
millionaires ever receive them. The shareholder ultimately bears the full
burden of these taxes.
In his analysis of these issues, Mr.
Berger sounded more like an Occupy Wall Street protester than a patriot or an
accomplished lawyer. Given the simplicity of his message and his dogged
repetition of talking points, I had to conclude that his group was created by
professional political forces as a facet of a much wider presidential
campaign.
The elevation of taxpaying into an act of patriotism seems a stretch for most
Americans. After all, the original patriots fought a revolution over their
desire not to pay what by modern standards amounted to a trivial amount of
taxes. To me, a true patriot wants to keep as much of his hard earned money
as possible. America is supposed to be, after all, the land of the free. The
more taxes we pay,the less
freedom we enjoy. Plus, the income that is retained by those who earn it will
lead to more wealth creation and, ultimately, to higher living standards for
all Americans.
Unaddressed by Mr. Berger is the likelihood that higher tax rates on the rich
may actually reduce tax revenue. Higher taxes will mean that the rich have
less money to save and invest, a greater incentive to avoid taxes, and a
reduced incentive to work or take risk. As a result, growth and job creation
will suffer and the government will not only lose tax revenue from the rich,
but also from the newly unemployed middle class workers that they no longer
employ.
The best thing the government can do for
the nation is to slash spending and free up resources for more productive
private sector use. Government spending is not "investment" as Mr.
Berger suggests but is simply wealth redistribution that creates political
rather than economic benefits.
If spending is not reduced, raising
taxes on everyone is better than only raising them on the rich. Taxing the
middle class is largely a means to substitute public for private consumption.
On the other hand, taxing the rich typically converts savings and investment
into government spending. Such an exchange actually inflicts more damage.
That may be a nearly impossible point to make politically, but sometimes the
truth is not pretty. If middle-class voters realize that they will likely
have to pay for all the free stuff promised by government, they may decide
that they no longer want it.
Peter Schiff is the CEO and Chief Global Strategist
of Euro Pacific Capital, best-selling author and host of syndicated Peter
Schiff Show.
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