Monday, November 19, 2012
Raising taxes on the rich raises taxes on everyone.
My home state of California just passed Proposition 30, which increases income taxes on residents who make $250,000 a year or more. The top marginal tax rate is now 13.3%, the highest of any state.
Proposition 30 was sold to the voters as "this won't cost you a dime, but it'll make the rich pay their fair share to put our schools back in shape."
Since so many voters thought they were excluded from the tax, and so many voters have no understanding of economics, the lower wage earners were able to vote to take money away from the higher wage earners.
But... they'll get hit just the same.
I was having this discussion a few weeks ago with the gentleman who pays me $4,300 per month to rent my old house. His kids attend public school – the cost of which is paid for through property taxes. Since I own the property he lives in, I pay the taxes. So he believed he could vote to raise taxes to improve the schools and it wouldn't cost him a dime – since he doesn't pay the taxes.
I had to explain to him that the amount I charge for rent is based on my ability to earn a profit on my investment (the home). That means I have to charge him enough to pay all the taxes and insurance on the property and generate a higher income than I could receive on an alternative investment.
If my property tax payment goes up, I would have to increase his rent by a similar amount. So while he doesn't pay the property taxes directly, his vote to increase my taxes would be a vote to increase his rent.
He was shocked... SHOCKED... that I would be so greedy as to force him to shoulder the burden of the increased cost of my investment. I explained to him the alternative if I was unable to earn a fair return on investment was to sell the house and move my money elsewhere – which would leave him and his family without a home.
Again, he expressed shock at my greed.
Funny, though... he didn't seem to mind it so much when he thought he was voting to take my money to spend on his daughters' education.
This is an educated man who is an executive at a large corporation... Yet he has no understanding of the basic laws of economics.
Is there any wonder we are in the mess we're in?
Prop 30 imposes an extra income tax, so it gets around the property tax issue. But the economic argument is the same. By imposing extra taxes on the "rich," the rich then need to raise prices in their businesses to make up for it... or else take measures to avoid the tax completely. That means everyone pays.
Best regards and good trading,
Find Jeff's radical proposal for the American tax system here:
If you want to spend time in "the happiest place on Earth," you pay the same as anyone else to do so. The United States should adopt a similar policy.
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