The 70% Tax on High-Income Individuals: Smart, Absurd or Stupid?

Let’s take emotions out, stick with logic and ask, would this actually work?

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I tried looking for a meme that wasn’t too controversial about taxes. This is the best I could find. (Picture source)

So this was a discussion that flooded the business world in the last few weeks. In case you are not aware, a certain congresswoman in the USA proposed a 70% tax on high-income individuals in the US. That is 70% on incomes above $10 million (which is still a proposed amount). The tax is said to be on the amount by which the income exceeds $10 million. The money is expected to be used to “take care of poor people” or do “something” about climate change. So, is this a smart thing to do?

Before I give my perspective on this matter, let me state some of the arguments I have seen. The most popular argument came in Davos (at World Economic Forum) where a moderator asked Michael Dell whether he supports the idea. Of course, Dell opposed the idea. His argument was, “where has that ever worked?” The moderator slightly mentioned the 1980s, then a professor quickly chipped in. The professor said the US had such a tax for high-income individuals between the 1930s and 1960s. A lot of supporters of the 70% wealthy tax thing praised the response of the professor.

In fairness, the professor went on to express that for such a tax, “the devil is in the details”. This means that what the tax will actually look like is not in what it is called, but what is in the details of the bill. The moderator of that panel in Davos just went on with other matters.

The reality is that they are both kind of correct. But the political narrative of the world is always tuned like a battle. They believe that if a color is not black then it is white. And if you support the color black then you are classed to be against white.

Where has a 70% tax on high-income individuals ever worked well? The answer is nowhere. What about in the US during the times mentioned? That will take us into a history lesson. I hope I can summarize as crisp as possible. The first pointer is, why was the idea stopped and why wasn’t it sustained? That tells you that it has been tried and abandoned.

To understand why a 70% tax on high-income earners was made a law in the 1930s, you need to understand what happened in the years leading up to that. The concern is not only in the US but around the world especially in Europe. It actually began with the first world war. Wars are fought with money. Instead of the countries that participated in the war to fund the war with taxes, they devalued their currency to afford the war.

Gold is known to be the sound money, however, the introduction of paper money (which started as receipts of gold ownership) made it plausible for governments to devalue the currency and wipe out the savings and wealth of the people. This devaluation has happened several times already and continues to happen today.

As you know the USA was in a depression in the 1930s. The depression actually started in 1929. A major highlight of that time was that people couldn’t find jobs. This was because companies couldn’t pay what was set as the minimum wage. It was said that some farmers burnt down produce just to prevent the price of their produce from coming down due to excess supply. One of the things that were implemented during this time was the 70% tax on high-income individuals to get the government to be rich enough to intervene. I understand it got as high as 94% at certain points. It is also worthy of mention that the US government forced people to sell their gold to the government giving the state control over money and wealth.

Why did this taxing stop? Some might argue that the high-income earners fought (politically) against it and won (which is not really wrong). But the truth is that the system was not sustainable. This is because those who are on that level have a certain lifestyle that their income funds. Reducing what they earn by that margin is not something such a people would accept easily. And it sort of discourages productivity growth that is beyond the $10 million income mark. Productivity growth is the real driver of the economy and many of these highly paid people are innovators that bring the sophistication that triggers advanced growth.

This twitter thread is the best “for” argument I have seen so far of the tax idea proposed. First, the author first explains that it is 70% above (the assumed) $10 million of income. This means if you earn $11 million, the $10 million get taxed normally and then the extra $1 million gets taxed 70%. That said, I get surprised at the impact people are assuming it would have on billionaires. Virtually no billionaire would be affected by this tax. It will only affect people like Hollywood celebrities, (some) wallstreet traders, employees with complex skills and vast experience, etc. Most billionaires are not high-income earners, they are a coporation. For example, the salary of Warren Buffet is $100,000, Tim Cook receives about $3 million (basic salary), Michael Dell about $950,000 (basic salary), Larry Ellison’s basic salary is $1. So they would not qualify for such a tax. So, if they say the “rich” will pay, it is really the top middle-class that would be paying. And if the idea includes a “net worth” criteria, then you can be sure it’s coming on the middle-class gradually.

Today, the US is not in a depression or recession. I know the country is deep in debts but the tax idea is not even to service those debts. That is the number 2 problem. Giving money to poor people or providing welfare for poor people is such a naive thing to do by any government. The function of government is not to take care of people. This is because governments are expected to be fair. When they start directly meeting the needs of people like the “almighty provider”, they become bias and become ineffective at their real duties.

A government is successful in an environment or society where a person no matter their origins can rise to the top without having to break any rules. However, some people have made a spiritual calling of a government position. That is the real problem today. They don’t know how to do anything else, they have literally been in government all their lives. The truth is that such a person would be out of touch with sound and logical thinking while struggling to relate with common people (because of democracy and elections).

Why would a 70% tax on wealthy individuals fail? It is because wealthy individuals are smart. That is how they became wealthy in the first instance. (I acknowledge that there are those who are victims of success though). If a 70% tax were imposed on such people, it will backfire on the masses.

Initially, it might be successful. Then, gradually things will start to change. How? If the government would not revert that position, first the country will be unattractive for rich people to live, work and play. This will trigger an exit of the wealthy from such a place. And you know what happens when that occurs; gradually productivity growth begins to dry up because those who make large contributions in value to the economy have been pissed off. And slowly but surely, poverty descends on the country. No country that puts up policies that hate the rich grow prosperous. If they were prosperous, they would start going down.

On the other hand, the rich might fight such a bill in the legislature such that it is gradually removed unsuspectingly. If that doesn’t happen then the unavoidable option comes into play.

Therefore, they will gradually extend the 70% tax to other earners. And before you know it, every responsible person will be paying 70% of the money they earn to the government. Incidentally, some set of people who are making those laws will create loopholes for themselves. And if things continue that way, the country will descend the kind of lows experienced by Venezuela today.

I loathe politics. I believe the government will be better without it and I hope sometime in the future we can get rid of the politics in governance. However, in the meantime, you need to realize that governance today is mostly politics. Think about this; those proposing a 70% tax by the government want to be the ones in charge of dictating where the money goes! Ask them if they can agree to this while the opposition government decides what is done with the money amassed.

This tax idea is not about the well being of common people. This is because if it were about the well being of common people, then what is needed is sound money! Money that the government cannot wipe out people’s savings. We all know that the government prints money and sends it into circulation thereby reducing the value of what each person earns and has. Why can’t that be stopped? And also if they care so much, then the Fed should not be allowed to “bailout” the economy with invisible checks during recessions.

The most amazing thing for me is the thinking by these government officials that money can solve the problem of poverty. This is a BIG FALLACY that must be rooted out of people’s minds. I have written a post about this before, focusing on third-world environments in abject poverty. Money is not the answer, value creation is the answer!

Take this as an illustration; a person buys a Rolls Royce. While some people might be mad about the amount of money spent, take some minutes to think about the genius that went into the making of that vehicle. I hear it takes about 13 months to get a custom Royce. Think about the people who have mastered the craftsmanship over the years and produce the beauty of it. Their handiwork deserves the price tag and deserves a buyer.

The one thing common with poverty-stricken places is the lack of something valuable, useful or delightful.

There is no hack to this law. Any attempt to go against that law is to beckon on the spirit of poverty. If I do something valuable and delightful, and I am rewarded the same as the guy that does nothing, I will either get out of such a place or never attempt such a thing again.

For common people, what they need is financial education. And it is surprising how many people lack it. It is what you teach yourself and what schools would not teach you. This is why many of the wealthy people in the USA are dropouts, the school system doesn’t teach about money. Learning economics is not the same as financial education. Only a financially educated person (who is wealthy) can tell you what financial education is. And the truth is that you have their books all around. Wealthy people share their insights all the time, but many common people would rather believe in challenges and excuses.

Finally, a “tax on the rich” concept is not smart, rather it is a short term magic that cunning politicians love. This is because it gives the politician the short term boost of popularity among naive common people. And the reality is this; the money will not solve any problem. And will only make many high-income earners hate the country.

70% tax on wealthy individuals is not absurd or strange. We have seen things like that before and it is a beginning of economically bad choices. In fact, I read that all taxes start out as a “tax on the rich” and eventually after a number of years, the middle-class will be left carrying the bag. The best argument (twitter thread) I mentioned earlier made a wrong claim by attributing the best economic times to when there were such taxes. First, that is wrong and even if correct, it would be wrong to base the state of the economy on that one thing.

Is the idea then stupid? I leave that to you to judge.

P.S. I understand this can be a sensitive subject as the congresswoman who proposed this idea is very popular online and has devote fans. This is not meant to be antagonistic of her in any way, but I think ideas should be logically and intellectually debated. I am not a US resident or anything so this is not from a perspective of a political camp. This is just common sense, broad perspective and logical thinking. I hope every reader of this article sees that.

Cheers!

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Inspiring and educating people about money, entrepreneurship, investing, and mindset. | For writers → amazon.com/dp/B08P2F2BPH | Others → davidolarinoye.com

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