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The Public Policy
‘Bait and Switch’ Taxes
Those who think President Obama’s tax hikes will spare the middle class are only deluding themselves.
We have heard many times from President Barack Obama how he plans to raise taxes on “millionaires and billionaires,” but not on the middle class. Apparently, if you don’t happen to be a millionaire or billionaire, you don’t have to worry.
But the numbers say otherwise — and say so big time.
The actual tax increase plans being proposed by Obama do not start with people who have an income of a million dollars a year. They start with people with incomes of $250,000 and up.
That is more than most people make, but it is far short of a million dollars, and miles away from a billion dollars. How many of the people who stand to get hit with Obama’s higher tax rate plan are in fact either millionaires or billionaires?
According to the Internal Revenue Service, there are more than 2,700,000 people who earn $250,000 a year or more — and fewer than one-tenth of them earn a million dollars or more. So more than nine-tenths of the people who would be hit with the higher taxes supposedly aimed at “millionaires and billionaires” are neither.
When businesses advertise one thing and then actually sell something else, that is called “bait and switch” advertising. That is exactly what President Obama is doing with his proposed tax increases on “millionaires and billionaires.”
It gets worse when you look at the potential economic consequences of the tax rate increases being proposed. The small proportion of the people targeted for Obama’s higher tax rates who are in fact millionaires and billionaires have the least likelihood of actually paying the higher tax rates.
People with annual incomes in the millions or billions of dollars can live pretty high on the hog on a fraction of their income, leaving them with plenty of money to invest. And they can invest it in ways that keep it away from the tax collectors. In addition to tax-exempt bonds, they can invest in other countries that have lower tax rates.
Hard facts show this happening as far back as we have had a federal income tax.
The Constitution of the United States had to be amended in 1913 to permit the federal government to collect income taxes. Almost immediately, very high tax rates on people with very high incomes led to their taking steps to avoid paying those taxes.
In 1920, Secretary of the Treasury David Franklin Houston in the Democratic administration of Woodrow Wilson pointed out that the taxable income of people with incomes of $300,000 and up had been more than cut in half, just from 1916 to 1918. He did not believe that this was because the rich were becoming poorer but “almost certainly through investment by the richer taxpayers in tax-exempt properties.”
President Woodrow Wilson himself urged Congress to reconsider whether very high tax rates are in fact “productive of revenue” to the government. He said that, beyond some point, “high rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation with consequent unemployment and other attendant evils.” That sounds a lot like where we are today.
Both Democratic and Republican presidents once warned that high tax rates can reduce economic growth. And Secretaries of the Treasury under both Democratic and Republican administrations once pointed out that higher tax rates do not necessarily bring in more tax revenues than lower tax rates. Yet this lesson from more than 90 years ago has still not been learned by those who advocate higher taxes on “the rich” as the answer to our fiscal problems.
In today’s global economy, it is even easier for genuine millionaires and billionaires to escape high tax rates by investing in other countries. Not so for the other nine-tenths of the people hit with higher tax rates, such as small business owners or independent professionals such as dentists or realtors, whose sources of income are necessarily local.
Those hardest hit by high tax rates that drive jobs overseas are likely to be those who are unemployed and need jobs here. Ironically, millionaires and billionaires may have the least to lose from higher tax rates on “the rich.” But Barack Obama has the most to gain from class warfare rhetoric that wins votes from gullible people.
About the Author
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
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Nancy in NC| 9.5.12 @ 7:50AM
One of the fundamental failures of the left is an inability to understand human nature. If taxes are raised on the "rich", the tax lawyers will have a field day figuring out ways to hide their wealth.
I am not wealthy, but I will struggle to contribute to my IRA rather than send money to the government. Those who can afford to do so will find creative ways to avoid paying excess taxes.
Let's face it. The idea of raising taxes on the wealthy is not to raise revenue, but to appeal to the envy of his base. But who's surprised? Obama seems to appeal to those who need someone to hate...anyone who disagrees with him.
Pecos Pete| 9.5.12 @ 8:31AM
Re 401K/IRA...
Get ready for the federal grab-a-mint to confiscate all 401K/IRA accounts. They will take the money and guarantee you a return of X% thus making your retirement investment, umm, safe.
And then they will redistribute your savings to those who have been unfairly treated. It is only fair, you know?
Darin| 9.5.12 @ 1:07PM
This is a fear which has been repeated over the years. While there are some in government who have just such an attitude, I don't see it actually happening. The outcry would be huge, and everyone would immediately pull their money out and pay the one-time penalty, thus destroying the economy. However, this still bears attention as some at the federal level do indeed seem intent on destroying our country.
Mike G| 9.5.12 @ 2:49PM
Our rights have been eroding away for decades because people believe that something won't happen. Who would have thought that the government would tell us that we had to wear seat belts in our own vehicles? Or talk about God in a public building? Or tell a property owner that they can't build because it would not be good for animals? Or what kind of light bulb one can use? Or that everyone had to buy healthcare? Are we going wait until the government confiscates our IRAs before we are willing to stand up and say ENOUGH?
Von Mises Jr| 9.5.12 @ 7:57AM
As Obama told Medvedev, "I can be more flexible after the election. It will be my last one."
While Dr. Sowell is completely correct, I take a more cynical view after watching the last Democrat President go back on his promise whining that he never worked so hard in his life to cut taxes, but SORRY.
If your family has an adjusted gross income of $70K ranges, you taxes will go up $4,200 next year if the current rates are not extended. If you earn $100K and after deductions have $6K month income before taxes, why would Obama want to give you a tax break? Wake up and smell the coffee! He does not have to, he is already secure for four more years and his leeches and stupid admirers are expecting to be rewarded for their support.
Even if you are not a business owner, your burden will go up by 3.8% with the new ObamaCare employer tax. So that $4K raise you were expecting is going to DC to pay for health care for illegal aliens. Am I the only one not so naive to figure out that $100K gross income is the top 1% to a globalist "One World Government" socialist?
Who Knows?| 9.5.12 @ 11:25AM
Keep up the great work, Dr. Sowell.
You're a national treasure.
JD| 9.5.12 @ 12:08PM
A rare disagreement with Sowell. Saying people making under $1,000,000/year aren't "millionaires" is false - many almost certainly have a net worth over $1,000,000.
Still, of course, many more don't. In fact, through the sale of one-time assets, many who make such amounts of money do so only once in their lives.
JD| 9.5.12 @ 12:09PM
Most Democrats aren't even conscious of the fact that they accept without question the notion that the purpose of tax policy should be to maximize federal revenue. This notion is absurd, and was recognized as such by both parties until recent history.
The maximization of private wealth has not been on Democrats' radar for generations.
Darin| 9.5.12 @ 1:10PM
Nearly 50% of the population pays no income taxes, and they vote Democrat. Hence, seizing what others have earned is not on their radar. Ultimately short-sighted and suicidal as there will soon be nothing left to seize, but such is irrelevant when you feed at the government trough.
Petronius| 9.5.12 @ 7:41PM
The economically illiterate boobs don't give a rat's rear about the dynamics of taxation. They care about the standard of living the rich enjoy that they do not. Value is relative to what they believe they deserve regardless of an employer's ability to pay. And "Social Justice" means satisfaction at the expense of their betters. My neighbor said he will vote for Obama for the sole reason that he promises to tax "the rich." Such is the maturity of the electorate.