Should the Rich Be Taxed at All?

Includes: DIA, QQQ, SPY
by: Steven Hansen

Econintersect has focused on the stimulus part of the tax law in Tax Law Stimulus - tax revenues of approximately $554 billion will have been foregone and GDP growth will have benefited by $368 billion - just in 2011.

GEI has not done the same analysis for 2012, but a quick look indicates that about $300 billion in tax revenue will be foregone and stimulus benefit will somewhere below $100 billion. Net effect of the new tax law for 2011-12 will be an increase in the national debt by something around $400 billion more than economic activity is increased.

Warning bells should be going off when the increase in government spending is greater then the growth of GDP.

Follow up:

The majority of the new tax law was designed to maintain the status quo. Even the extension of the 99'ers unemployment insurance benefits was a social program keeping the unemployed earning money. Without this law, the GDP would have fallen in 2011. There is little argument this new tax law was necessary IF the objective was to maintain the status quo.

The controversial portion of this legislation was extending the Bush tax cuts to the rich. Much has been written on this topic. Should the rich shoulder more of the load of financing the government?

Consider that a sovereign government with its own fiat currency does not NEED to tax - but taxes to achieve social and fiscal objectives. Consider why we tax:

  • Redistribution of Wealth. The wealth disparity in America is growing. The social fabric of a country is strained when the poor become too poor (or the number of poor increase). Taxes are used in an attempt to correct this imbalance, the problem is that the redistribution to the poor is not being done in a manner to stimulate / help the poor improve their lives - and the current method only acts as a safety net to prevent the poor's existence from becoming intolerable.
  • Encourage National Policy Objectives. It has been the stated policy of the every American administration since WW2 to foster home ownership - and the government uses its tax policies to ease the tax burdens on homeowners. Another government encouragement is for investing in means of production through a lower capital gains taxation rate.
  • Economic Accelerator / Decelerator. Higher taxes slow an economy down by removing money from the economy while lower taxes accelerate an economy. Taxing interest income penalizes savings, and encourages spending. Deducting interest paid encourages deficit spending.

The unfortunate fact is that it is rich people who provide the investment money – and this money is now leaking overseas funding growth in Asia, or being used to profit in activities which do provide a societal benefit.

It is the only the rich who can provide the funding for real growth which provide new jobs. America has morphed its taxation incentives so that it is more profitable to make money investing in activities that do not produce real economic growth. Making money on stock movements or ultra-high leveraging of risky financial assets that only benefit the speculators have limited societal benefit.

It was the initial investment which created the benefit to society - the rest is speculation.

The American national tax priorities are geared towards consumerism and a wide interpretation of capital investment - with much of the capital benefits only rewarding the investor. There are systemic fault lines in our thinking about taxation.

click to enlarge

Hat tip for this editorial cartoon that mentions the strangely familiar “unemployed dollar” phenomenon to News from 1930. Should money sitting idle be taxed?

Conversely, should money spent or earned which serves strategic national economic objectives be taxed at all?

Economic News this Week:

Econintersect economic forecast for December 2010 estimated level or slightly negative economic growth. This week the Weekly Leading Index (WLI) from ECRI improved from -0.1% to a positive 0.8% implying the business conditions six months from now will be roughly the same as today.

Initial unemployment claims in this week's release were relatively unchanged, and are at levels where minimal jobs growth is possible.

No data released this week was inconsistent with Econintersect’s November forecast of slow growth. The table below itemizes the major events and analysis this week (click here for interactive table).

Bankruptcy Filed this Week: Cardima

Bank Failures this Week: None

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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