Making the Poor, Rich

If you care about your personal wealth and retirement and the folks around you, you need to care about supply-side economics and support policies that encourage production.

"The dream in America has never been to make the rich poor. The dream in America has always been to make the poor rich," said supply-side economist Art Laffer.

If Laffer is right and our goal is not to take from people of have —for the most part— worked hard over several years to earn relatively high levels of income but instead to raise the standard of living to never before seen heights, we need lower income taxes in America.

Nonetheless, President Biden wants to see income taxes raised to what some have called the highest levels in the developed world.

You're Not Taxing Who You Think You Are

The first problem with increasing tax rates either to get more government revenue or to redistribute wealth is that the folks paying these higher taxes are not the "wealthy" per se but high-income earners.

Think about it this way. When someone is starting out in his career, he is paid an "entry-level" salary. But after a couple of decades of hard work and perseverance, he will earn a much higher income. That higher income is not somehow stolen from the poor, it was earned. Nonetheless, this fellow will pay more taxes under President Biden's current budget. And this fellow is representative of a high-income earner.

"Most of the people described as "rich" in discussions of tax issues are in fact not rich at all but simply people who have reached their peak earnings years, often having worked their way up to that peak after decades of earning much more modest salaries. Progressive income taxes typically hit such people rather than the genuinely rich," wrote economist Thomas Sowell in his book, Basic Economics: A Common Sense Guide to the Economy.

Next, let's consider someone who is actually wealthy. Those individuals have options beyond taxable income. For example, did you know that income from municipal bonds is tax-exempt? So if a person is very wealthy and derives income from investments, that person can move money invested in stocks or new businesses to municipal bonds, reducing their taxable income when the government raises marginal tax rates.

The wealthiest folks don't depend on income to pay the bills in the same way that someone working at a corporate job does. The wealthy can use stored wealth without generating new income. Worse still, raising taxes could increase poverty and financial woes.

Thus, when the U.S. Federal government raises the marginal tax rates, it could be taxing folks who have simply reached a peak earning age, not some robber baron, as U.S. representative Alexandria Ocasio-Cortez from New York's 14th congressional district seems to have implied.

The Paradox of Higher Taxes

"'Death and taxes' have long been regarded as inescapable realities. But which of the various ways in which taxes can be collected is actually used, and which particular tax rate is imposed, makes a difference in the way individuals, enterprises, and the national economy as a whole respond. Depending on those responses, a higher tax rate may or may not lead to higher tax revenues, or a lower tax rate to lower tax revenues," wrote Sowell.

"When the state of Maryland passed a higher tax rate on people earning a million dollars a year or more, taking effect in 2008, the number of such people living in Maryland fell from nearly 8,000 to fewer than 6,000. Although it had been projected that the additional tax revenue collected from these people in Maryland would rise by $106 million, instead these revenues fell by $257 million," continued Sowell.

"When Oregon raised its income tax rates in 2009 on people earning $250,000 or more, Oregon’s income tax revenues likewise fell by $50 billion," wrote Sowell, adding that "Conversely, when the federal tax rate on capital gains was lowered in the United States from 28 percent to 20 percent in 1997, it was assumed that revenues from the capital gains tax would fall below the $54 billion collected under the higher rates in 1996 and below the $209 billion that had been projected to be collected over the next four years, before the tax rate was cut. Instead, tax revenues from the capital gains tax rose after the capital gains tax rate was cut and $372 billion were collected in capital gains taxes over the next four years, nearly twice what had been projected under the old and higher tax rates."

It is clear that raising taxes does not always get more income for the government or do anything to improve life for the poor.

Raising taxes into a prohibitive range will have two outcomes. It will increase poverty, and it will negatively impact government revenue.

Let's chat first about poverty and, frankly, your own personal finances.

"What we found," said Larry Kudlow, the former Director of the National Economic Council of the United States, was that "lowering marginal tax rates actually reduced poverty and reduced income inequality."

"The middle and lower quintiles advanced —on a percentage basis— better than the upper quintiles," Kudlow continued.

Thus, when America has had periods of relatively low top marginal tax rates —thank you, Presidents Kennedy and Reagan— the nation has enjoyed economic growth, and the poor enjoy a better standard of living. We effectively make the poor, rich, or at least better off.

Making the Poor, Rich

The way to improve our economy and give the poor a boost is to lower tax rates and not interfere with the economy; the more a government tries to control things, the worse those things get.