Nothing like a Gibson For The Blues.
Little Change From the 50's. The democrats want the poor people to resent the rich. I remember growing up in the Clear Creek Valley of Colorado. Most of the people there were blue collar folks who called the republicans the party of the rich and the democrats the party of the "workin' man." I am proud of my blue collar roots but not sure the democrats have ever totally represented my views.
President Obama Exploits This Concept. He continues to harp on the idea that the rich don't pay enough taxes. He knows that no matter how high he raised the top bracket it won't help the deficit. There simply aren't enough rich people to make a dent in it. He's adopted this strategy because the average person resents the wealthy and how well they live. What the less wealthy among us fail to recognize and Obama fails to tell us is that there is a huge difference between high income and wealth. No matter how much he raises the top brackets, he won't be able to have much effect on the wealthy person who doesn't want to pay taxes.
Look At This Example. A citizen has just sold his business and has a net of fifty million after taxes. He's tired of working and tired of having a high level of risk in his life. He spreads this cash among several demand deposits in several banks. These funds earn no income and he doesn't care. He doesn't live cheaply, spending about a million dollars a year. At the end of two years he has $48 million and has paid no taxes. At this point he is tired of watching his nest egg decline and he invests 30 million in a portfolio of conservative growth stocks that pay no dividends but grow at the rate of 6% per year. Since he still has no income, he still pays no taxes. At the end of ten years, he has spent $10 million from his cash reserve and is down to eight million. His stock portfolio has grown to almost $54 million. He's lived very well, created more wealth than he started with and has paid no taxes. All without finding exotic loopholes that no one else knows about. If he wants to draw cash from that portfolio he might sell some stock and pay tax at the lower capital gains rate. As an alternative, he can fund his expenses by borrowing from his portfolio and, although he has to pay interest, he will still owe no taxes and the interest paid will still be less than the tax he would have owed. How does he get around the eventual tax bill on the growth in the stock he has accumulated? He dies. The heirs will inherit the stock at the fair market value at the time of death and there is no capital gains tax. Estate taxes are another story and if you want to know how to get around those, we can save that for another post.
What we need to emphasize here is that these aren't loopholes that are only open to rich folks. They are part of the tax code available to everyone. If your assets are less, divide by the difference. If you have only $500,000 or 100 times less than 50 million, divide everything by 100. You can have $10,000 per year to spend and pay no tax. Of course, you can have more than this since only 53% of Americans pay tax any more. A family of four with an income of $50,000 can take advantage of the tax code and pay no taxes.
Are You Disappointed? If you were anticipating some deep dark secret that allows the rich to avoid taxes, you may be disappointed. My dear wife thinks I am wasting my time trying to explain the difference between high income and great wealth. But its very important. She says I should try to put together a short five word sound bite that explains what I mean. I can't explain things in a five word sound bite but its important to remember that taxing the hell out of a high income taxpayer isn't as fair as you think. I remember one year when everything fell into place and I had a $140,000 tax bill. I also remember that I had years when I didn't make as much as my lowest paid employee. Three years after that high tax year, I was struggling to keep the business going. This is more the rule than the exception. High income people seldom stay that way for long. We are much better off with a tax code that encourages savings and investment than one where the government confiscates the money and spends it on wars, welfare, and entitlements.
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