Market Analysis

Soak the Rich

Ah, Tax Day! The one day Americans stand united in their utter contempt of their state and federal government.

Ah, Tax Day! The one day Americans stand united in their utter contempt of their state and federal government. Suddenly, the most dedicated, Che-beret wearing, entitlement program apologists start quoting from Atlas Shrugged.

Oval Office-minded politicians are already calling for the reversal of the 2001 and 2003 tax cuts. Without that tax revenue, our government will surely run out of money! Right?

It's a bit awkward that tax receipts are reaching record levels and that insidious budget deficit has been halved since 2001. Nevermind, plucky politicians claim the current economic expansion is being driven by "unusual consumer activity." The only problem is, our economy is always driven largely by "unusual consumer activity." Nothing new here. Only a politician could be puzzled that Americans, with more dollars in their pockets due to tax cuts, are spending their windfall.

The facts are in: Tax cuts mean higher tax receipts. Why? More money in productive hands leads to a healthy economy and more income for everyone! Yay! Is it mere coincidence that incomes are higher and US household net worth has reached record heights?

Tax Facts
By Bruce Bartlett

Turns out, the best way to soak the rich is to lower tax rates. Consider this: The richest 1% of Americans pay about 35% of all income taxes, despite earning less than 17% of the country's income. The bottom 40% pay not a dime in income tax.

What about the middle class? Aren't they being squeezed? Not according to the Congressional Budget Office. The "middle class" make 14% of the nation's income, but pay 5% of the total income tax. Oops. Looks like more than one presidential hopeful has some line edits to make before the next big speech. Arguing that everyone should pay "their fair share" suddenly seems like a rallying cry for increasing taxes on the middle class. Oh wait! Too late . . . the AMT already does that.

Unfortunately, investors are facing a huge tax hike should Congress not extend the tax cuts. Politicians claim it's not a tax hike, that they'll fix the system by substituting this tax for that one (some nonsense known as "paygo"), that these were never permanent cuts. That's fine for stumping politicians, but the market will see it differently.

Investors won't be keen to be doubly punished for taking risk—once by market volatility and again when the taxman takes his cut. Starting and running a business is another risky venture that will seem less appealing when faced with higher tax rates.

Intriguing solutions have been proposed. A flat tax, for one. A national sales tax, for another. Either solution would reduce our over 13,000 page tax code behemoth—perhaps to a single page! Fine, maybe two. It would kill a massive governmental bureaucracy and likely put an end to corporate accounting scandals, once and for all. Think how the market would respond if corporations focused solely on their core competency, and not on complying with onerous regulation!

Will it happen? Not likely, but we can dream. In the meantime, let's soak the rich the right way—through tax cuts.

Read more interesting commentary on the tax cuts and our tax code:

Case Closed: Tax Cuts Mean Growth

By Fred Thompson, Wall Street Journal (*site requires registration)

The Taxpaying Minority

By Ari Fleischer, Wall Street Journal (*site requires registration)

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.