Taxing the Rich More Will Not Solve Anything

Overtaxing the rich is the fastest way to ruin the economy and society at large. 

There is a point of vilification of the super rich in current day media. Lot's of complaining. When I refer to the rich, I'm talking about the upper class folks that make up the 1% or so. 

Though I suspect the anger is fueled by plain old jealousy and envy instead of something one person directly did to you. It would be unfair to typecast a group of people because of one asshole that ruined 1 minute of your day. 

Whether it's in Canada or the US, there's been talk about finding ways to tax the rich more. 

We all get taxed. Some more than others. I find it akin to a punch in the face. It hurts. I'd rather not have it happen to me if I had a choice. Everyone is getting punched in the face and the more you make, the bigger the punch. Many are now asking the rich to get bigger, harder punch. Sooner or later, they're not going to want to get punched anymore. Any prudent person will leave to somewhere that won't punch em as hard. 

The rich are paying for the things we use.

I thought about the idea of earning $900K in salary. You'd pay about $450K in taxes in Toronto. I'm sure most super rich folks will not waste their wealth on getting a salary and use other means of getting their income but let's assume that some don't yeah? Even with $900K paid out in full eligible dividends (i.e. dividends from public stocks) they'll still pay $300K+ in taxes. All that money goes to the government. 

The rich pay the most taxes. The taxes I've paid are peanuts that definitely do not cover a teacher's salary. The unfortunate reality that they are underpaid is a separate issue I won't dig into here. In essence, the rich are the biggest income source for the government than the majority of the lower/middle class. We're not the golden geese for the government. The amount of taxes someone with a $900K salary will pay is equivalent to 45 people earning $50K. FYI, in 2015, the top 1% accounted for 22% of Canada's income tax and the top 5% accounted for 42% of the income tax. 

We create the economic value in the world and the government collects part of the value we've created. What the government does is make spending decisions with all that cash. A good government will make good spending decisions to support the nation so we can collectively generate greater economic value.

So, if the government starts targeting the super rich (their most valued customers) and taxing them even more, they'd get pretty unhappy. They'd want to leave. The angry poor may want this and maybe that's the ploy. Albeit, one that is short-term minded and quite stupid. 

If the rich are the big income generators, that means a lot of our public social programs like schools, healthcare (for the Canadian readers), community centers and transit are funded by them. The funny thing is that the rich probably don't use most of these programs. They probably send their kids to private schools, get healthcare in a foreign country where you don't have to wait 2-5 hours for an emergency or 6 months for a MRI, and rarely take public transit. They definitely don't need the welfare or any social income program the poor take advantage of. 

I'm not saying we should all be grateful that the rich are paying their taxes. They're just following the law like everyone. But, if we vilify them for their own income levels, it can only result in a negative economic outlook for the country. 

Let's not forget that many startups and businesses are either funded directly by the rich or by government investment funds that still run on tax money collected from the rich as well. They play a crucial role in also bringing money in from their other rich friends outside the country. I think that's better than filling up the country with debt. 

They can just leave.

The super rich is that they aren't tied down. Most lower and middle class people are tied down to their jobs. The super rich make money off assets. Like living off of an investment portfolio with a nice dividend payout from their equity ownership in businesses (or something like that). That's probably how they got rich in the first place anyways. So, unlike most of the population, the highest contributing customers have the most amount of options. If their assets are purely investment portfolios they can just leave and plop down anywhere. That's what happened in Paris when the super rich all left in waves. 

Hence, vilifying and targeting them can only lead to a long-term decline in the country's economic future. The assumed "win" for a petty and envious heart is neither good for the country or for the individual swallowed in jealousy. 

Having more wealthy people is better for the country. At the very least, it makes it economically relevant in the world. No one cares about 5M lower income people. But 500 wealthy can move the needle. They are the ones who can elevate the status quo for society at large. 

It's a complex problem that can't be solved with simple answers.

I'm not saying the growing gap between the rich and the poor is good. It isn't. The average has to be elevated to a higher level. This essay is not a solution essay I'm afraid. It's a rather complex problem that should not be tried to be answered with simple answers like raising taxes on the rich. At best it's a marketing gimmick used by desperate politicians prying on the anger of the lower income. It's cheap and insulting. 

In such a situation with a difficult problem where you have no idea what the right answer is, I think about what Charlie Munger would say: 

"Invert. Always invert. Many hard problems are best solved when they are addressed backward." - Charlie Munger

So, we can ask ourselves: "If we didn't want to solve this problem for the long-term, what should we do? What would be a great way to ruin the national economy for the long term?" An answer would be to tax the hell out of rich people. That will fail us in the decades to come. It won't hurt the legacy of a politician's 4 years in office but it'll hurt us and our children for decades to come. 

We need to work together on this one.

One thing I think could be a potential solution is to change the perspective. 

"You don’t have to make money back the same way you lost it.” - Warren Buffett

This is an investing quote but a lesson can be applied to the current situation. Just cause we get punched in the mouth, doesn't mean we should punch the rich harder. Look for a solution somewhere else. 

A potential area is in the mindset and education. The rich teach their kids how to maintain their wealth and build upon it. Putting the power of compounding to work. The poor probably don't. That can lead to anger but anger has only brought tragedy to the world. Jealousy and envy are petty useless feelings that do no one any good. 

It's about teaching the coming generations a survivorship skill. The government is moving into bringing personal finance education early to younger students and it's the right move. I'd argue this is more important than history or art class. If reading about financial collapses in the global economy at age 13 makes you realize you should pay off credit card debt ASAP and not think a student loan is free money, then all the power to you and learning history but I doubt this will be the case for most. 

My friend told me that famous rappers like Jay Z are taking an active role in teaching personal finance for impoverished youth as well. In all honesty, the rich giving back with their own direct programs would be faster than the government. This is how we can work with the rich to elevate the status quo together. 

Just a thought from the sidelines. It just pains me to see envy, jealously and lack of perspective ruin it for everyone. 

 

Did You Enjoy This Post?

JOIN THE COMMUNITY BY SUBSCRIBING TO THE WEEKLY NEWSLETTER

INCLUDED IN THE NEWSLETTER ARE:

I LOVE HEARING FROM YOU AND IF YOU HAVE ANY IDEAS, FEEDBACK OR JUST WANT TO CONNECT REACH OUT!

EssaysDaniel LeeOMD VenturesCareers