Higher Taxes Promote Eating the Rich

     Is it possible to tax only the rich and leave everyone else alone?

     I have met and talked with many politicians, mostly when they were out speaking for their suppers just as I was. I repeatedly spent backstage time with four former U.S. Presidents, policy wonks like Bill Bennett, military leaders like Gen. Colin Powell and even a couple flaming liberals including Mario Cuomo. Some smart, some not. 

     But never have I encountered any as obtuse and ignorant about business and economics as a former vice president from a Democrat administration who, out of courtesy, I won’t name. But you can guess. There aren’t that many of them. Fortunately.

     On a long night flight to Minneapolis many moons ago, alone in first class, we debated. He insisted you can tax business with no consequences. I patiently explained you can’t, that, in fact, business never pays taxes and never will.

     I told him that, as a business owner myself, whenever a tax is demanded of me, I go collect it from somebody else. I may raise prices if I can, which fuels inflation, which steals most from the lowest wage workers who spend 90 percent of all they earn on necessities they must buy (while I spend only 1 percent on necessities). 

     I may freeze wages and may cut jobs via outsourcing, automation, or merely lower service, putting more work on fewer desktops, which fuels unemployment. I probably do some of both. But I don’t roll over and take a pay cut myself. Businesses don’t pay taxes. Ever. He could not grasp this and ended the flight still believing government can impose higher taxes on business with no negative effects on anyone other than the business owners or company shareholders – who are, after all, rich and making too much money anyway.

     His willful ignorance is exceeded only by those buying Obama’s promise to tax the rich and only the rich. You can’t actually tax the rich. You can tax the poor, they have no recourse. But the rich have many choices in the way they respond to being hunted and punished.

     Since a great many own businesses, the response I just described above occurs. They recover whatever new tax burden is imposed by raising prices and wiping out jobs. The more you tax the rich, the more do-it-yourself machinery replaces clerks in grocery stores, fast food joints, airline terminals and even casinos. Bye-bye jobs.

     The more you tax the rich, the more the companies they own make mammoth investments overseas or outsource jobs there (think call centers handling orders for every imaginable product). Bye-bye jobs.

     The more you tax the rich, the more motivated they are to cut every cost incurred by companies they own, so manufacture and assembly of products, printing of catalogs and brochures and books, even bottling of iced tea moves from U.S. to China.

     But that’s not the only response. The rich have everything they need and much of what they want, so they can – and occasionally do – go on spending strikes. As their purchasing stalls, providers of virtually everything must raise prices.

     I have a closet full of perfectly nice shoes and need not buy any shoes for years. But Working Mom with three growing boys must buy shoes every few months. If shoemakers get less revenue from me, they make it up by charging Working Mom more.  If the rich go on a prolonged spending strike, the trickle down damage can undermine the entire economy.

     How many first, second, third and fourth tier jobs tie to the rich’s buying of million dollar high-rise condos, boats, cars, vacations, apparel?  The rich can even go on an investing strike, removing their money from circulation, stepping away from risk and investing less. When that happens, the 12,000 Dow dropped to 10,000 drops to 8,000, and who is hurt the worst? Workers in their retirement funds, retired seniors relying on dividends. 

     If you slam the purported-to-be-rich small business owner with an increased Social Security contributions cap as much as doubling that tax, erasure of the Bush tax cuts, and jack-up capital gains tax, can you really imagine he will just bend over and say “Thank you Obama, may I have another?”

     If you double the amount taken from the family farm’s harvest for taxes, do you think the owners will keep farming as if they have no choice but to suffer any abuse or theft?  If you whack the wealthy investor four times harder, do you think he’ll still put as much at risk funding new company start-ups, new product research, creating as many jobs?  Of course not. Every action has a reaction.

     The media are pitifully ill-equipped to honestly discuss this, as most have never done anything but migrate from universities or political jobs to punditry; certainly never met payrolls. Further, they are unlikely to challenge an idea they want to believe, and nobody likes the eat-the-rich mantra better than the media.

Dan Kennedy is a serial entrepreneur, adviser to business owners, sought-after speaker and author of 13 books. More information about Dan can be found at www.NoBSBooks.com, and a free collection of his business resources including newsletters and webinars at www.DanKennedy.com.