Despite the breathless post-election "think pieces" that have drawn sweeping and deeply considered conclusions about the political drift of the country, at its core President Obama's re-election is easy to understand. He essentially promised millions of middle and working class voters that if he were to be re-elected, they would receive benefits paid for by the rich. You don't need to read a Time Magazine cover story to untangle this political strategy. Now that he has been given a second term, Obama needs to deliver the goods by raising taxes on the rich and only the rich. He will be "asking" them to pay their "fair share," (as if "asking" and "fairness" have anything to do with it). In reality the wealthy already pay taxes at a much higher rate than average Americans and in many cases will now have to pay more than half of their income in federal, state, and local taxes.
While most people would assume that the wealthy would chafe at such a heavy burden, some affluent individuals have apparently organized spontaneously to express their willingness to help the country. In interviews and articles, these self described "Patriotic Millionaires" have implored Congress and the President to raise their taxes. They claim they can easily afford to pay a little more to save the nation from fiscal insolvency.
Conservative economists believe that an economy is most vibrant when as much money as possible is left in the private sector where it can be used for business investment and job growth. Left wing economists believe that government spending, which they term "investment," does more good. Through this lens, it's tempting to see the Patriotic Millionaires as well meaning Americans who have simply subscribed to a misguided economic philosophy. However, the reality may be far more sinister.
Daniel Berger, a spokesperson for the group, joined me last week on my radio show. Based on that highly charged and polarized discussion, it would be logical to conclude that the group is simply comprised of Democrat shills masquerading as patriots. Time and again Mr. Berger regurgitated Democratic talking points without the slightest ability to critically analyze his own positions. His goal was to simply create the impression that paying high taxes is patriotic. His hypocrisy was not hard to uncover.
He admitted on the show that he used an accountant to prepare his own taxes primarily to ensure that all the forms were filled out properly. Mr. Berger is a highly successful attorney purportedly earning over one million dollars per year. But apparently even that level of expertise does not qualify him to confidently fill out a 1040. Of course, the real reason he hires an accountant is to minimize his taxes. He, like every other American with an ounce of honesty, wants to make sure that he pays as little tax as the law allows. He hires an accountant to make sure no deductions or loopholes go unexploited. Under normal circumstances, there would be nothing wrong with that. But when you publicly claim that it's your patriotic duty to pay more taxes, it's hypocritical to simultaneous pay an accountant to make sure that you actually pay as little tax as legally permissible!
He revealed to me that it wasn't so much his own taxes that concerned him but other millionaires that he is convinced unfairly pay a lower rate than he does. As a lawyer, his income comes in the form of fees. Therefore he pays most of his federal taxes at the 35% rate (plus Medicare). However he seemed disturbed that other millionaires, who may rely on dividends and capital gains for much of their income, pay only 15%. When I explained that corporate stockholders have already paid a 35% tax on their share of corporate income before they received any personal dividends or capital gains, he claimed that corporate income taxes have no impact on either dividends or share prices. Really?
I suppose being a high powered lawyer and tax-loving patriot doesn't necessarily involve a basic understanding of finance or accounting. A corporation's stock price and its ability to pay dividends are a function of its after-tax earnings. The higher the tax rate, the less the company is worth and the lower the dividend it can pay. So gains and dividends have already been significantly diminished by corporate taxes before the millionaires ever receive them. The shareholder ultimately bears the full burden of these taxes.
In his analysis of these issues, Mr. Berger sounded more like an Occupy Wall Street protester than a patriot or an accomplished lawyer. Given the simplicity of his message and his dogged repetition of talking points, I had to conclude that his group was created by professional political forces as a facet of a much wider presidential campaign.
The elevation of taxpaying into an act of patriotism seems a stretch for most Americans. After all, the original patriots fought a revolution over their desire not to pay what by modern standards amounted to a trivial amount of taxes. To me, a true patriot wants to keep as much of his hard earned money as possible. America is supposed to be, after all, the land of the free. The more taxes we pay,the less freedom we enjoy. Plus, the income that is retained by those who earn it will lead to more wealth creation and, ultimately, to higher living standards for all Americans.
Unaddressed by Mr. Berger is the likelihood that higher tax rates on the rich may actually reduce tax revenue. Higher taxes will mean that the rich have less money to save and invest, a greater incentive to avoid taxes, and a reduced incentive to work or take risk. As a result, growth and job creation will suffer and the government will not only lose tax revenue from the rich, but also from the newly unemployed middle class workers that they no longer employ.
The best thing the government can do for the nation is to slash spending and free up resources for more productive private sector use. Government spending is not "investment" as Mr. Berger suggests but is simply wealth redistribution that creates political rather than economic benefits.
If spending is not reduced, raising taxes on everyone is better than only raising them on the rich. Taxing the middle class is largely a means to substitute public for private consumption. On the other hand, taxing the rich typically converts savings and investment into government spending. Such an exchange actually inflicts more damage. That may be a nearly impossible point to make politically, but sometimes the truth is not pretty. If middle-class voters realize that they will likely have to pay for all the free stuff promised by government, they may decide that they no longer want it.
This article is contributed by Euro Pacific Capital and does not represent the views or opinions of International Business Times.