Tax the Rich?

It's an idea that looks great on paper, and certainly the masses enjoy the idea of taking money out of the pockets of the rich. While the vote in the recent reelection for President Barack Obama was not a clear mandate for higher taxes, the Obama administration is definitely interested in continuing its pursuit of diminishing the wealth of the most wealthy people in the country. In fact, he recently announced that he wants to raise $1.6 trillion in new tax revenues, which is double the amount he originally said he wanted.

The question is who ultimately pays the tax? I think the answer is very clear. It's not the rich.

In order to understand how taxes affect everyone and not just the rich, one has to keep in mind what businesses do when they have to incur higher costs to run their businesses. Higher taxes are costs.

While it is not a direct comparison, I can use my rental property as an example of what happens when the cost of owning and operating that property increases. As a part of the rent I offer my tenants "free" heat. I put the word free in parenthesis because whether or not the heat is truly free is a bit of sleight of hand, is it not? So long as my rental property produces cash flow, the actual cost of the heat is being paid by the tenant. So, what happens when the cost of my heat bill goes up? Of course this cost is ultimately passed on to the tenant in the form of higher rent.

The same applies to the cost to insure my property, or the cost of repairs to the property. You can also apply this to higher costs incurred through higher property taxes. All of these costs are ultimately passed on to the tenant in the form of higher rent as well. Perhaps the costs are not immediately passed on. But at some point they must be, otherwise I have no reason to own the property.

I've made the point before that businesses do not pay their overhead. In fact, they recoup their overhead.

In addition, it's important to note that any money that the government collects from the private sector are essentially removed from the real economy. I've heard many people on the left argue that dollars collected in tax revenues are simply spent by the government, and that those monies ultimately wind up in the economy as a whole inevitably.

The problem with this thinking is that it is not exactly true. Consider that much of the dollars that the government collects must go to repaying debts and interest we owe on those debts. That means that a lot of the money goes to other governments we've borrowed money from—China would be one of the larger ones. We also spend hundreds of billions of dollars a year in foreign aid. Again, that money does not necessarily return to our own economy. The money essentially just disappears.

At the end of the day higher taxes on the rich and on businesses means less money will be spent on investing in new company startups. It means less money will be spent on research and development, and on capital expenditures. It means less money will be available to hire more workers, or provide pay raises. It means less money will be available to pay, for example, certain benefits like healthcare for their workers. It means less money will be available to make matching contributions to their worker's 401k plans. It means less money will be spent on marketing that helps their businesses to grow.

And let's not forget the first example I made about investment. Less money will be in the real economy for people to help companies obtain the funds they need to expand the business. All of this leads to higher unemployment, less job creation, and higher prices for all of the goods and services that the middle class, and the poor buy.

When it comes to taxes, people really need to see the forest for the trees. Sticking it to the rich is sticking it to ourselves, and there really is no way of getting around that. If President Obama does not cut spending, and reduce taxes across the board, the people who will be hit the hardest are the very people who he says he wants to help.