Tax the Poor?

     Many things seem intuitively obvious.  Often the obvious
conclusions are wrong.  Many never figure that out.  Nowhere is
this more true than in matters of economics.  Some ignore sound
economics because they believe economics is boring.

     The disaster that voters court by voting based on wrong
economic conclusions won't be boring.  Is an exciting disaster
better than being bored?

     The controversy over whom to tax and how much oozes
with false knowledge about economics.  I don't know to what
extent the politicians are ignorant and to what extent they merely
take advantage of the voters' ignorance.

     "Tax the rich" is popular because to most people it is
code for "tax someone else."  The big myth is that taxes are
detrimental only to the person who pays them.  If the myth were
true, taxing the rich would make some sense.  The rich won't
feel much pain from paying a bit higher tax.

     Before laying on the taxes we should consider who,
besides the taxpayer, will be harmed.  Rich people save and
invest.  No mater how great the income of an individual he will
never be rich if all he does is spend.  If all he does is spend, he
will be poor the instant the income stream stops.

     The person who has millions isn't likely to greatly change
his life style or spending habits merely because his taxes go up
10 or 20 percent.  Instead he will invest less.  Net investment in
the USA is down about 20 percent since the beginning of the
recession.

     Another way of putting it is, we have eaten 20 percent of
our seed corn that produces future wealth.  Any tax that
decreases investment will only reduce production and wages. 
Everyone will suffer, not just those who pay the tax.

     When we spend instead of invest we can never undo the
damage.  Even if we go back to investing we never recover the
lost investment.  We are all poorer today because of the decade
plus of lost investment during the 1930s and 1940s.

     When we don't invest we don't build factories, mines,
harbors, trains, and all the other things that make workers more
productive.  The only way wages can increase is through
increased investment.

     Taxing the rich is but a minor annoyance to the rich.  It
can devastate marginal workers and the unemployed who need
new investment to provide them with more productive, better
paying, jobs.

     The tax that will have the least detrimental, long term
impact on everyone is a tax that does not reduce investment. 
The only way to implement such a tax is to tax those who don't
invest.  That would mean taxing only the poor and spendthrifts. 
Spendthrifts are only one paycheck away from poverty.

     Taxing the poor will reduce their spending on
consumption.  Government, or the recipients of government gifts,
will spend the money.   The government spending may be
wasteful.  Still, it will replace the spending taxed away from the
poor.

     Investment will still sustain increased productivity. 
Eventually this increased productivity will allow even the taxed
poor to regain their lost purchasing power.  Tax away the
investment capital and we will all spiral down into a bottomless
economic pit.

     Thus, taxing the poor, while stopping short of the point
of taxing them into starvation, will in the long run hurt the poor
less than will taxing the investment capital away from the rich
and anyone else.  I'm not advocating increased taxes for the
poor, or anyone else.  Instead, cut government spending.

     Like it or not, government spending will be cut -- 
drastically.   The most we can do by increasing tax rates is
postpone the inevitable cuts in spending and make them more
severe.  Continuing down the tax and spend super highway we
will soon consume the rest of our investment seed corn.

     We can't consume what we never produce.  We are now
headed back to the world that existed before the industrial
revolution.  Most politicians in D.C. are shouting "Full speed
ahead."

aldmccallum@gmail.com
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Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284