By John Tamny, Toreador Research and Trading (Guest Contributor)
Last week was the deadline for filing federal taxes, and much like in years past, we've been bombarded in the weeks leading up to this uncomfortable moment with statistics showing who in America actually pays. Most prominent has been an Associated Press report that revealed 47% of U.S. households don't pay federal income taxes at all.
A scary number for sure, and one that bodes ill for the future. If we're all equal in the voting booth, but are unequal when it comes to paying what politicians term our "fair share," it's not a reach to suggest there will be a growing problem of those not burdened by federal taxation voting to give themselves benefits on the backs of those who do pay.
So while tax inequality is an issue that must be addressed, numbers like the one provided by the AP obscure a greater, more economy-sapping truth about taxation in the United States. Specifically, the heavy tax bills paid by the more prosperous among us are very much the burden of the less well-off. Indeed, when the rich are fleeced, it is the non-rich who truly suffer.
To see why, we need to ask ourselves if we've ever been turned down for a business loan or investment, if we've ever complained about a soft jobs picture, and most of all, if we've ever yearned to work for a company only to be told that a hiring freeze would make working there an impossibility.
For readers who've experienced any or all of the above scenarios, one likely explanation concerns a political class that seeks to penalize the economic success of the rich. When politicians achieve this pernicious goal, those who are not rich are the unfortunate victims.
To understand this reality, it's important to remember what the late columnist Warren Brookes long ago observed about the quality work opportunities most Americans increasingly enjoy. About them, Brookes once wrote, "We are all blessed by the genius of the relatively few."
What Brookes was saying is that while a large number of Americans have the skills and work ethic to thrive in work environments, there are very few among us with the drive, determination and genius to actually start job-creating companies. Those who do are the "vital few," and when we tax the vital few, we're making their work efforts very expensive.
To state the obvious, it's extremely difficult to start a business, let alone one that thrives over time, so when entrepreneurial success is penalized, the geniuses in our midst face a difficult decision. They can build their companies despite all the stresses and strains involved--not to mention the possibility of stupendous failure--or they can sit back and relax.
As taxes rise on the most vitally industrious people, their incentive to engage in the risk and stress involved with founding a business is reduced, and the losers are the many non-rich Americans who would benefit from working for them. Taxes are a negative price put on the efforts of the vital few, and the individuals who pay this price are those who must navigate less robust job opportunities.
Considering the hiring freezes many corporations are imposing at present, we have to ask why they've stopped hiring. Well, the answer is simple, and it has to do with the basic truth that there are no jobs without investment. Companies as a rule want to grow, want to extend their reach into existing and soon-to-be-existing markets, and to do so they frequently need to hire workers in order to execute their plans.
The problem is that companies can't hire unless they have the free capital to do so. So who among us does have free capital?
Once again, it's the rich. By virtue of being rich, the well-to-do in our midst have a great deal of disposable income. When the government is not confiscating it, this capital is either saved or invested. So when readers experience the frustration of hiring freezes--or salary freezes, for those lucky enough to be working--they should think once again of the rich.
Because when politicians earnestly promote tax increases that will "only" affect those with high incomes, they're being cruelly deceitful. Every dollar taken from the rich is one less dollar invested or saved, which means the tax burdens placed on the rich result in jobs that pay less, or in no jobs at all. "Hiring freezes" merely speak to low levels of free capital.
And those government benefits that so many low- and middle-income Americans supposedly can't live without, aren't those paid for by the rich? Not really. Once again, those not wealthy will pay through the nose for inefficient government programs owing to the tautological reality which tells us that government spending funded by the rich naturally draws down the incomes of the non-rich.
Nothing in life is free, and that applies to government programs that might appear to be do.
Lastly, there are doubtless many Americans of average income who would like to earn huge amounts of money through entrepreneurial innovation. They yearn to be tomorrow's "vital few."
In their case, simple Schumpeterian logic applies, telling us there are no entrepreneurs without savings. Many of us yearn to become a future Bill Gates, but unless we're independently wealthy, we must access the savings of others in order to fund our dream.
Loans and venture capital are usually the way in which we do this, so when politicians tell us they're going to use the tax code to penalize high incomes, "unearned income" of the investment variety, estates and other forms of saving, in truth they're penalizing the not-yet-rich entrepreneurs of the future who will suffer a less robust investing and loan environment. Innovation requires investment, and with the rich frequently the source of investment, their tax penalties are paid for by both the entrepreneur and consumer.
Returning to the fact that 47% of Americans don't pay income taxes: For the good of the nation, and so that we don't become a country of free-riders, it's important that we make taxation more equitable. But let's not delude ourselves.
Whether we pay lots of tax or none at all, we all suffer the greedy hand of government. And contrary to popular belief, those not taxed are the ones victimized most by government policy meant to put the squeeze on wealthy taxpayers.
About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.