Why you can't increase taxes only on the rich.

It is common for politicians, when talking of raising taxes to promote the idea that they will be either taxing only the rich or taxing the rich more heavily. The idea being that they can raise the necessary revues by passing the costs only on those who can afford it.

Is that a something that any part or whole of the US government can do?  I don't think so.

Certainly, they can raise the tax rates on only those with incomes in a certain range, or they can tax only goods and or services that only the wealthy are likely to use.  But does that cost truly come from the wealthy?  Again, the answer usually is no.

The problem is that, as I say with nearly everything, it is more complicated. You cannot simply isolate one part of our economy.  When you make a change to one aspect, there are naturally changes to other parts.

Let us start with income taxes.  If you raise taxes on these high earners, what will be the result?

First you must look at what you have done.  What you have effectively done is increased the disparity between the business cost and the personal reward for the highest income labor.  To help that make sense, let's put some numbers in there.  Say we are talking about a $300,000 salary.(For now lets ignore other taxes, fees and benefits, since their impact is roughly the same before and after an income tax change).  With our current tax rate, the employee would pay about 33% of that income in federal income tax.  This means that it costs the company $300,000 to provide that employee with $201,000 in compensation (again excluding other taxes and benefits).  If you were to increase the tax rate to 40% it would then cost the company $335,000 to provide the same $201,000 in compensation or alternatively the company can pay the same $300,000 and the employee with now earn only $180,000.

If the latter result above is what happens, then the tax would primarily affect the rich.  Why is that considered to be even a likely outcome, much less the expected one?  If you were to suddenly have a permanent pay decrease for performing the same job, how would you react?  Would nothing change?  People who earn high incomes are able to do so, because they have skills which are in high demand, they have a willingness to work at a higher level than most, and/or they are willing and able to take a much higher level of responsibility.  If you decrease their compensation, most people are either going to move on to a place where they are better compensated or they are going to work less.  Either way, what you have actually taxed is not the wealthy employee, but the business.  It will have to either increase salaries to compensate to the taxes, or it will have to hire more people to do the additional work.  Essentially, employees pass on the much cost of their taxes on to their employers. Though we negotiate gross salaries, it is the net salaries that really concern employees.  Someone isn't going to do the same work for $7 an hour in take home pay that they will do for $9 an hour, even if the gross pay is $12 in either case. The same is true (perhaps more so) for those earning much higher wages.

Fair enough, businesses that can afford to pay people enough to be wealthy are wealth themselves, so taxing them is till taxing the rich.  Not exactly.

The problem with taxing companies is that you are simply increase their labor costs.  When a company has increased costs they can do many things, but they all boil down into one of two actions.  Either they increase the price of their product or they lower its quality.  This means that the increased costs of the company are felt, not by the employees but by their customers.

This is the same scenario you run into if you increase corporate or business taxes.  Increasing those taxes is simply increasing the cost of the goods or services that the business provides.  The reaction of the business will be to pass on that cost to the consumers.  In some cases this can force a reduction in the size of the company, which can cause layoffs.  The reason for this is probably a topic for another post, but it happens is most cases.

This leaves only investment income as a source of taxing the rich. Here again, you run largely into the same problem.  If you increase taxes on investment gains then you simply reduce the return on those investments.  This forces those seeking investment funds to offer more to get the same investment.  Just because investments are more expensive doesn't mean that investors are willing to risk their funds for a lower return.  The result of this is that starting companies are not able to retain as much revenue to use for growth and expansion as they instead have to use more to repay investors.  It also means that potentially profitable business are not able to get funding as their potential profits are not hight enough to attract investors.

None of what I have outlined above is 100%.  In reality the wealthy individuals targeted will pay some of the tax increases, but they will pay nowhere near all of them and the rest will be paid, indirectly, by the non-wealthy.  So while you can increase taxes on the rich and you can increase how much they pay, you cannot do so without a significant portion of those tax increases actually being paid by the poor and the middle class.