Why higher taxes benefit the wealthy

The economic landscape seems pretty clear. The great divide.

a. On the one hand, the wealthy citizen abhors higher taxes, even taxes which are raised to address the increasing Federal and state budget deficits. After all, they worked hard for their money. Why should they sacrifice their gains to help others.

b. On the other hand, we have representatives in the Senate and House of representatives and various other spokespersons for the common man and woman. These voices reason that the wealthy have gained the most so they should be most willing to sacrifice some of their wealth for the common good. Who can better afford these sacrifices than the wealthy?

But what is a sustainable solution to this socio-economic puzzle? Certainly we can all agree that the annual budget deficits of $1 trillion dollars ($1,000 billion dollars) cannot continue indefinitely.

I would propose that diminishing this annual deficit, even if achieved by increased taxes will benefit both those of considerable wealth as well as those of modest income. And here is why.

The mere idea that this annual deficit will diminish is likely to have a massive, positive impact on the economy and the financial markets that reflect economic well-being.  And the wealthy stand to benefit significantly from the growth in both the economy and the markets.

I submit that the benefit of increased income of the wealthy will outweigh the sacrifice that they endure through increased taxes. Consider the following example: Row

Row

 Year 1

 Year 2

 Year 3

1

Annual income

 $ 250,000

 $ 300,000

 $ 400,000

2

Incremental tax on investment gains from year 1

 $ 10,000

 $ 30,000

3

Annual taxes

 $ 74,500

 $ 84,500

 $ 104,500

4

Tax as a % of total income

 0.30

 0.28

 0.26

 

5

Gain over year 1

 $ 50,000

 $ 100,000

6

Tax increase over year 1

 $ 10,000

 $ 30,000

 

7

Net change over year 1

 $ 40,000

 $ 70,000

In this example, in row 1, the wealthy taxpayer experiences a significant increase in capital gains from investments as a result of the lower budget deficit.

In row 2 we see that the taxes increase as well, but not nearly as much as the gains.

But as rows 5, 6, and 7 show, the increase in taxes is far less than the increase in income resulting in a substantial net benefit to the wealthy taxpayer.

This example illustrates that if the increase in taxes will result in a lower Federal deficit, then the wealthy taxpayer actually derives a net benefit from higher taxes.

This puts the wealthy taxpayer and the modest taxpayer on the same side of the increased tax argument.

A reduced Federal deficit, even at the expense of higher taxes,  benefits the wealthy earner and the moderate earner alike.

Why government savings are just pennies on the dollar

Our federal budget deficit is $1,000 billion dollars each year, year in and year out, as far as the eye can see.  This is an annuity in reverse, every year, on into the future.  After five years, we will have accumulated $5,000 billion of debt.  After 10 years, $10,000 billion of debt.  You get the picture.

So what is the federal government doing about this?  They are looking for ways to reduce spending.  But here is the curious part.  When they find a suitable candidate for expense reduction, they always multiply the savings by 10 and call it a savings over 10 years.  As in a $250 billion reduction in educational expenses over 10 years.  And when we hear of their accomplishment, we are so excited about the $250 billion number that we fail to pay attention.  We never see or hear the part about over 10 years.

And it sounds like a pretty good effort. After all, we are saving $250 billon compared to a deficit of $1,000 billion.  It feels like we are taking a solid chunk out of our annual deficit.

But are we really?   Closer reading, and listening, reveals a painful truth.  The $250 billion in savings is spread over10 years.  In actuality, we are saving only $25 billion each year. 

In other words we are not reducing our annual deficit by 25%.  No, we are reducing it by a mere 2.5%.

And this, after all, is just pennies on the dollar.