Tax the Productive

Hillary Clinton made the news a week or so ago by saying the rich don’t pay their fair share of taxes, echoing statements President Obama has made since his presidential campaign. But the remedy they recommend is to raise income tax rates on high-income earners. That’s not taxing the rich, it’s taxing the productive.

Rich people are people who have lots of wealth. People become wealthy by spending less than they earn, so their incomes can turn into wealth. But there is a difference between income and wealth. Someone can be rich — owning substantial wealth — without earning much income. Someone who has inherited a fortune, for example, but doesn’t have a job, can be rich but low-income.

Meanwhile, someone earning more than $250,000 a year (apparently, President Obama’s threshold for determining who’s rich) might have little wealth. One could imagine, for example, a heart surgeon who’s just finished her residency starting out with a high income, but little wealth, and maybe even negative wealth if she’s put herself through medical school by taking out loans.

If someone were really serious about taxing the rich, they’d advocate taxing people on their wealth, not on their incomes. For example, Bill Gates, and Warren Buffett, two people who have advocated higher taxes on the “rich,” both got rich not through earning high incomes, but on capital gains from the increases in the values of their companies. If Gates and Buffett were serious about taxing the rich, they’d say that rather than paying income taxes they should be taxed a percentage of their wealth they’ve accumulated.

I’m not advocating actually taxing the rich. I think it’s a bad idea. What I’m saying is that when people say the rich should pay more, they never advocate policies that actually would make the rich pay more. They advocate policies that would make high-income people pay more.

People’s incomes (much more than their wealth) come from their productivity, so when people advocate taxing the rich by increasing income tax rates, they’re not really advocating taxing the rich (because they’re not advocating a wealth tax), they are advocating taxing productivity. It should be obvious that increasing taxes on our most productive citizens is counterproductive.

People in government tend not to recognize how much risk there is in earning high incomes. They picture high-income individuals earning salaries just like minimum wage workers earn the minimum wage. They don’t see that those high incomes come from the people who earn them making risky choices. The entrepreneurship that drives our economy and gives us continual economic progress comes from those high-income risk-takers. Raising taxes on high income individuals will reduce entrepreneurship and slow growth.

President Obama and Secretary Clinton are not the only ones who confuse high-income people with the rich.  Here’s a piece by the Tax Foundation attacking Clinton’s statement that the rich don’t pay their fair share. But the Tax Foundation too confuses the rich with high-income earners, noting that people earning more than $212,000 pay more than 40 percent of federal taxes. We can safely call those people high-income earners, but we have no evidence as to whether they are rich.

What we’re really debating, then, is whether productive individuals are paying their fair share, not whether the rich are. We need to make the distinction in public debate between “rich” and “high-income,” because they are not the same thing. The current administration is calling for higher taxes on the productive, not on the rich.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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