Copyright by John T. Reed
Obama, Pelosi, Reid and all the other anti-business, anti-rich nut jobs will, if allowed, enact a ton of IF laws. They all have this format:
If you do X, you must do it the way we say.
If you do X, you must pay this tax.
For example, if you sell health insurance, you must not turn away persons with pre-existing conditions.
If you make more than $250,000, you must pay a 2.38% tax on “unearned income.”
Obama and his ilk, being ignoramuses about incentives and business, think businesses and rich people are inanimate objects from which money can be extracted. Obama does not believe money grows on trees. He believes it grows on rich people and businesses. All he needs to do to spend that money is remove it from the businesses and rich people.
They have it. We want it. We will take it. We are the mighty U.S. government. Businesses and rich people are powerless to stop us.
Here’s the way it really works.
Business people and rich people (other than heirs, lottery ticket winners, etc.) did not get to be successful or rich by being stupid.
Plus, they have an extremely different perspective on IF laws than dummies like Obama. Obama thinks those laws say things like “health insurers will accept pre-existing conditions” or “people who make more than $250,000 a year will now send me more of their income.”
Not at all. Businesspeople and the rich read such laws this way:
I have two choices:
• I can stay in health insurance and accept pre-existing conditions or
• I can do something else
• I can continue to make $250,000 before tax as defined by the Internal Revenue Code and pay higher taxes or
• I can change the way I earn my income either simply making less than $250,000 or by changing the details of the income so it moves to a less taxed category of the Internal Revenue Code.
For a detailed example of the latter, read my book Aggressive Tax Avoidance for Real Estate Investors, now in its 19th edition.
Maryland famously decided to tax the rich more heavily in 2008.
It raised the tax bracket to 6.25%. Baltimore and Bethesda also impose income taxes. The combination of state and local tax rate can go as high as 9.45%. Governor Martin O’Malley said the rich (made more than $1,000,000 a year) were “willing and able to pay their fair share.” The Baltimore Sun said the rich would “grin and bear it.”
In 2009, one-third of the millionaires disappeared from Maryland tax rolls. In 2008 about 3,000 million-dollar income tax returns were filed; in 2009, 2,000. Maryland politicians figured they would get $106 million more from the tax. In fact, they got $100 million less—a total $206 million loss to the state run by those politician geniuses.
This is best known as the Laffer Curve effect. Arthur Laffer is quick to point out that the first known person to write about the revenue-depressing effect of overly high tax RATES was Adam Smith in 1776.
Think of it this way. If the tax rate is 20%, the government collects a certain amount. If it’s 21%, they collect more. But what if you raise it to 100%? Obviously, they would collect 0 because no one would go to work. The government would also collect 0 if they lowered the tax rate to 0%.
If you graph tax revenue by max tax rate from 0% to 100%, you find that it maxes out at about 20% to 25%. When you go above that point, the revenue goes down because people change their behavior to avoid the tax. They retire, change businesses, change states, invest in tax shelters, cheat, etc.
NJ politicians started beating up on car insurers not too many years ago—like Obama and health insurance companies. They passed more and more laws against the car insurance companies. NJ became the toughest state in the nation to be a car insurance company.
IF you sell car insurance in NJ, you have to do X, Y, Z, A, B, C,…
I do not know the details, but I seem to recall reading that car insurers, whose marketing plan was to be nationwide, decided 49 states was enough and stopped selling car insurance at all in NJ. Eventually, all or almost all of them left the state and the state had to be its own car insurer. That was a disaster. So they had to entice real car insurers to come back and did. I may be a little off on my facts. I would appreciate hearing from those who know better.
Recently, several states cracked down on Amazon regarding sales tax by taxing Amazon through its affiliates in the state.( You cannot make a company that has no offices in the state pay sales tax on sales in that state.) Guess what Amazon did? They instantly stopped selling products in those states at all through affiliates. Those affiliates—local persons who were helping Amazon sell books and stuff and who were getting paid by Amazon for doing so were all put out of the Amazon business. Those people had been paying state income tax on their Amazon earnings. Now their Amazon earnings are zero, lowering the amount of state tax they pay. And the sales tax paid by Amazon did not go up from zero. it is still zero. All the politicians in those states accomplished was knocking a bunch of their own small businesspeople out of business. Way to go geniuses!
Raising tax rates make earning money less attractive and makes avoiding taxes by spending more on tax advice, relocating outside the jurisdiction raising the tax rates, and even cheating more attractive.
When you tax something, you get less of it.
When you subsidize something, you get more of it.
Obama and his fellow geniuses tax successful business and individuals and subsidize people who are unemployed, who do not pay their mortgages, who are in unions, and so on.
Consequently, they will get less tax revenue and have to shell out more to loafers.
Higher tax rates change the economics of businesses, often to the point where they are no longer profitable. Take Amtrak. Once upon a time, railroads that provided passenger service were privately owned. But government encouraged unionization of railroads, the high tech rich companies of the day. And the government held down the ticket prices to please the voters. Ultimately, all, I repeat, all of the privately owned railroads got out of the passenger business. There is only one passenger railroad in the U.S. now: Amtrak. It is unionized, government owned, ratty, never on time, and never operates at a profit even though its supporters promised that it would when it started in 1971. Want to see the future of health care? Take a trip on Amtrak. Actually, running a railroad is pretty straightforward. Health care will be far more screwed up by government ownership than the railroads.
Every time Obama passes one of these beat-up-on-the-rich or business laws, the rich and business stop doing the thing in question or do it differently so they are exempt. There is no free lunch, not even for politicians who failed to learn about economics or business when they were growing up.