Increasing income taxes doesn't affect the rich

May 5, 2011

Baltimore, Maryland

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We're waiting for a sell-off...either at the end of QE 2... or in anticipation of it. When will it come? We don't know, but it won't keep us waiting forever.

Meanwhile, we are seeing more and more rich-bashing in the press.

Most people hate the rich. And why shouldn't they?

The rich are good at hogging the good things in life. That's why they're rich, after all.

They get the fancy digs. The fancy cars. The fancy girlfriends.

You see them enjoying life in business class seats, while you ache in economy. You see them pulling their Mercedes and Audis into their big garages, while you make do with a humble split-level on the wrong side of time. And their wives always look like they just came out of a beauty spa....

Their stocks are going up...while you can't find a job!

The rich learn how to manipulate the system for their own benefit. That's the way it always works. Money likes power. Power likes money. Usually, they find a way to work together.

The rich howl about how much in taxes they pay. They whine about 'soak the rich' proposals. They kvetch about 'giveaways' to the zombies. But, they are probably more in control than they appear.

Take Mark Zuckerberg for example. Please. Here's a guy who says he would be "cool" if they raised his income taxes. In this refrain, he joins the sanctimonious choir headed by Warren Buffett, Ted Turner, and other do-gooders.

Well, guess what. You know why they don't mind an increase in the income tax rate? It's because

  • they are so rich that the marginal utility of money for them is close to zero. They won't even notice an income tax hike. Money hardly counts when you have as much of it as they have. It is like an extra snowball to an Eskimo. It just doesn't make any difference.

  • They don't pay much in income taxes anyway. They tend to have their wealth in stocks. And they make most of their money from stock market gains, which aren't taxed as regular income; they're taxed as capital gains.
Here's Newsweek with the story:
It's easy for Mark Zuckerberg to say he's 'cool' with raising income-tax rates. Because it won't affect him.

It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he's in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett's blood boiling when the Facebook founder declared himself "cool" with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two.

Bartlett, a former member of the Reagan White House, isn't against the wealthy paying higher taxes. He's that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It's a hollow gesture to say the federal government should raise the tax rate on the country's top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that's because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.

"It's easy to say 'Raise taxes' when you know you're not going to have to pay those taxes," Bartlett says. "What I don't hear is 'Let's raise the capital-gains tax.'
*** We published an item from Vanity Fair a few weeks ago. It explained how the top 1% of US households now earns nearly a quarter of all the income...and controls 40% of the nation's wealth. The richest people have increased their incomes 18% over the past decade. At the middle and lower income levels, on the other hand, earnings have actually gone down. Many of the good jobs have gone overseas...while cost of living continue to rise.

The rich are getting richer than ever. The middle classes are having trouble making ends meet. Think about gasoline at $4 a gallon. To a rich s.o.b. in New York or San Francisco, it hardly matters. But it's a big deal to a truck-driving cracker from Alabama or Georgia.

But, if you're rich, watch out. Because sooner or later the mobs are going to figure out what has happened to them. Then, they're going rise up and go after you. It won't be pretty.

Eventually, people will figure out how it works. They'll see how the 'rich' - or at least some of them - colluded with the government to rip off the middle and lower classes. Not exactly intentionally. It involved more stupidity than cunning. But here's what happened.

The feds created the dollar-based monetary system in 1971. Wage gains ended three years later.

The Fed held interest rates artificially low...and undermined the purchasing power of the dollar. It made more sense to spend than to save.

This eroded the benefits of building capital - either in the form of machinery or worker training. EZ money devalued the hard work, patience, and savings needed to create high value-added industry. Americans became good consumers, not good producers. And since they were not producing high quality products, they couldn't command high salaries. More and more, the labor force moved to low-paying service jobs that required little training and little capital investment...and shopped for cheap goods at discount stores.

Meanwhile capital gains tax rates were lowered, and business profits increased as jobs were outsourced to lower-wage economies.

The middle and lower classes were snagged in debt, particularly through federally subsidized mortgage lending. Then, the feds turned the financial industry into a vast hedge fund.

The genius of the hedge fund is in a trick of mathematics. If I invest your money and take 20% of the gains, it sounds like a decent deal. I only make money if you do. And you get the lion's share. But over time, I will eventually get all your money. Because you will take all the losses while I chip away at the gains, year in and year out.

When the financial industry's credits went bad, the feds stepped in to bail them out. Now, Wall Street is enjoying the "heads I win, tails you lose" life of a hedge fund. The dollar - along with the yen - has become the funding currency for speculations all over the world. If the speculations go well, the industry collects huge performance fees. If they go badly, the feds lend the failed speculators more money - at zero cost.

Of course, here at the Daily Reckoning, we always take the part of the under-dog. Besides, we've been rich and we've been poor. Being rich isn't necessarily any more fun, but at least when you're a rich underdog, you don't have to worry about money.

*** Osama bin Laden....

Most of the world heaved a sigh of relief when the world's most wanted man was gunned down. Apparently unarmed.

But here at the Daily Reckoning, we were neither relieved nor revenged. We were uneasy. It did not particularly concern us that another world improver was dead; what bothered us was that there were so many left alive. Many of them - terrorists and terrorist-fighters -- may now be throbbing to commit even larger acts of improvement.

*** Our old friend Doug Casey has more thoughts on Osama bin Laden's killing...

"The whole thing stinks, from top to bottom. You'd think that if they knew where he was, they would have gone out of their way to take him alive - at almost any cost. Think of the information he would have had! But instead they seemed to go out of their way to kill him, which impresses me as incredibly stupid and counterproductive... Unless they don't want him talking.

"After all, Osama said several times that he had nothing to do with the events of 9/11. But Bush used him, and 9/11, as the casus belli for Afghanistan. It would have been interesting to know who Osama thought was actually behind 9/11.

"Then, after killing him, they dump his body in the Arabian Sea, using the excuse that he had to be interred within 24 hours as a Muslim, and it wasn't possible to bury him because they didn't want to create a shrine. As if they go out of their way to bury every Muslim they kill within 24 hours... I suspect that, in fact, they leave most bodies as a treat for the dogs and the crows. We'll now never know whose body that was. Or exactly how he was killed.

"So now, in any event, all the physical evidence has been disposed of. It's unclear to me if they also executed everyone else in the house - excuse me, "compound," as any house government agents attack automatically becomes a compound - where they took him. I suspect everyone was executed. Witnesses are never convenient.

"I have a question: Quis custodiet ipsos custodies - Who watches the watchers? I thought it was ironic that Putin of Russia - who's undoubtedly put out quite a few orders for hits in his day - evidenced outrage at the way the U.S. government is trying to kill Gaddafi, now that it seems expedient. I have it here - Putin said: "Who permitted this, was there any trial? Who took on the right to execute this man, no matter who he is?"

"And he's right. I find it shocking that the U.S. government just takes it upon itself to kill people now, without even a show trial like Saddam got. Of course the government has always had professional killers in its employ - but it at least had the decency to deny their existence. Now it brags about them, and parades them. It's always had secret prisons too - but now it's quite overt about Gitmo and renditions and torture.

"IDon't get me wrong. I believe Osama is dead - whenever he died. And I'm glad he's dead. I don't like the things he believed in, especially his especially puritanical version of Islam. But this is not the way these things should be handled. At least not by a supposedly free country."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Increasing income taxes doesn't affect the rich"

Maulik Suthar

May 5, 2011

Nice title. Not even inflation can touch rich.

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