Have you heard about the new study that proposes a 90% tax rate on the rich? Even after spending hours pouring through the 52 pages of their research, I’m still baffled by their recommendations. To help you better understand the potential impact; let’s look at five reasons a 90% tax rate would devastate the U.S. economy.
Professors Fabian Kindermann from the University of Bonn and Dirk Krueger from the University of Pennsylvania, recent study suggests that everyone in the U.S., even the high-income earners, would be better off if the personal income tax rates went from 0% to 90% instead of the current rates that go from 0% to 39.6%.
While I don’t dispute any of their findings, I do dispute their conclusions. My experience is that you can get statistics to say just about anything you want them to say. Such is the case with the conclusion of professors Kindermann and Krueger that if you effectively tax the income of the anyone earning more than $450,000, everyone, including the rich, is better off.
Let’s take a closer look at why a 90% tax is actually the complete opposite and bad idea for everyone, including the rich, poor and middle class.
Reason #1: People in the higher tax brackets will work less and produce less.
It is well documented, and Professors Kindermann and Krueger do not dispute, that entrepreneurs will stop working as hard and producing as much once tax rates top 45%. While professional athletes and actors may continue to play ball and make movies, entrepreneurs will reduce the time and effort they spend building their business. Because entrepreneurs do most of the investment and create most of the jobs in this country, that means high tax rates, fewer jobs created, more people on welfare, and more strain on the government. So while people will be able to continue watching LeBron James play ball, they may have more time to do it because they will be out of a job.
Reason #2: Entrepreneurs will stop driving the economy.
Like it or not, Ayn Rand was right when she wrote her seminal book, “Atlas Shrugged”. When producers lose the incentive to produce, they simply stop producing as much. The difference in available cash between earning $450,000/year and earning $2,000,000/year, when you are stripping 90% off the difference, is miniscule (the net benefit to the entrepreneur is only $155,000). But the difference in lifestyle is considerable, as it takes much more work, capital, risk and effort to create and sustain a business earning $2,000,000/year than it does to create and sustain one that nets $450,000/year. Why would any self-respecting entrepreneur take the risks and put in the effort to build a business whose profits go almost entirely to the government?
Reason #3: It’s not just the Rich who pay higher taxes
Kindermann and Krueger aren’t suggesting that we leave everyone’s tax rates the same and just add more taxes to the rich. When the rich pay more taxes, so does everyone else. The way the U.S. tax system is set up, as your income increases, so does your tax rate. So whether you make $100,000 as a couple, $200,000 or $500,000, you will be paying higher taxes. Does the middle class really need a tax increase? Do we really want to be like Great Britain, where they pay 40% taxes if they make over $60,000?
Reason #4: Producers will leave the U.S.
Remember that business owners don’t have to live and operate in the U.S. to take advantage of the U.S. and world economy. With the Internet and advanced transportation systems available today, entrepreneurs can work from anywhere? My office may be in Phoenix, Arizona, but I am writing this article from Washington, D.C. When taxes get high enough (45% seems to be the magic number), entrepreneurs will simply move out of the U.S.
Reason #5: The Rich will find a way to pay fewer taxes
When the tax rate exceeds 45%, there is a huge incentive to avoid taxes. The best tax reform done in the past 50 years was the 1986 tax act. Why? Because that was the year the tax base was expanded and tax rates drastically reduced. The result was that there was no longer an incentive for people to enter into transactions purely for tax reasons. Instead, people were motivated by the economics of the transaction. Going to a 90% tax rate would have the exact opposite effect.
So let’s look at reforming the tax law not by raising rates, but by reducing government waste and eliminating true loopholes. The tax law functions best when it rewards, not punishes, those who create jobs, construct housing, and produce energy.
Tom Wheelwright, CPA and CEO of ProVision, is a leading tax and wealth expert, published author (Tax-Free Wealth) on partnerships and corporation tax strategies, and a Rich Dad Advisor/Speaker for Robert Kiyosaki, who wrote Rich Dad Poor Dad. Tom is best known for making taxes “fun, easy and understandable,” and specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes. He has been on the Real Estate Guys Radio Show, Money Radio 1510 Business for Breakfast and frequently speaks at Rich Dad conferences worldwide.