"Taxing the rich" is shaping up to be a huge election issue.
But with more than $15 trillion in debt and the government running up yearly deficits of more than $1 trillion per year, it doesn't make much economic sense for this administration to harp about taxing the rich.
Given the enormity of the country's fiscal problems, these tax hikes would be woefully insufficient to put a dent in the problem.
For example, President Barack Obama's latest "Buffett Rule" tax proposal whereby taxpayers who make more than $1 million per year would have to pay a minimum of 30 percent on income doesn't bring in much revenue.
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The rough estimates of extra tax revenue are between $40 billion and $50 billion per year. While every little bit helps, this is hardly a game-changer.
The federal government currently spends over $3 trillion per year and deficits are over $1 trillion.
The maximum $50 billion estimate represents only about 3 percent of last year's deficit. Even assuming all this extra revenue goes directly to paying down the deficit, which it wouldn't, it would still do very little.
Where's the rest of the plan?
If tax hikes are going to be a serious part of deficit reduction, they would have to go a whole lot higher. And, what would be a realistic growth assumption at those higher rates? Even using the most optimistic GDP growth assumptions, the government will still also have to cut spending and reform entitlements.
It isn't like the "Buffett Rule" is item No. 16 of a comprehensive deficit reduction package.
But why is this tax such a big deal when it does so little? Given the severity of the nation's fiscal problems, the solution of simply sending the government a little bit more money is weak to say the least.
Obviously this is politics. It feels good to tax the rich. Also, many people are unaware that the new tax will do so little to help the deficit. The administration understands the pervasiveness of the false perception and intends to exploit it.
But, I believe there is something else — what I call the "beachhead" theory.
President Obama ultimately wants to raise taxes much higher, expand government much more, and redistribute wealth to an extent never before seen in this country. But, he won't dare lay his vision out for the American people. That would be political suicide. He might speak in platitudes like "fairness" or a "balanced" approach. But, he wouldn't dare tip his hand on the specific policy measures he will propose in support of these lofty platitudes.
His intention is to incrementally transform the country, one falsely disguised step at a time.
Politically, he can't just raise taxes across the board. He needs to start with something much more sellable.
It's analogous to America's World War II strategy in the Pacific. Right after Pearl Harbor, we couldn't just go barreling into Tokyo. It was too well defended. We would have gotten ripped apart. Instead, we started by invading the most far flung, poorly defended territories the Japanese empire controlled. Once we seized the farthest outlying territory, we used it as a launch pad to go after the next weakest held territory, and so on.
In this case, the farthest outlier and most poorly defended in terms of tax policy is taxes on millionaires and billionaires. After all, these people only account for a tiny portion of the electorate. And, who cares if they pay more? They're rich already. But, make no mistake about it. A higher tax on millionaires won't be the end of anything, it will be just the beginning. It Congress passes this tax it will serve as a political base from which to launch more taxes.
After most people see a tax hike implemented with no detrimental effect to their finances, they will be more willing to accept new taxes. The next target will likely be the $200,000 and higher earners. Then, within a short period of time, the administration will be perfectly comfortable suggesting new taxes that it wouldn't dare suggest at this point. Eventually, all tax payers will pay more, either by a higher rate or some other backdoor method.
This new millionaires' tax may be just people who can easily afford it paying more taxes. But, it is also something much more ominous. It is the crucial first step, or launch pad, for much higher taxes for all taxpayers and wealth redistribution on a scale most have not imagined.
About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.
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