There is an interesting argument surfacing about income tax increases in America. Advisors to the President have had strong influence in creating the position of “fair share” and inequality of income increases over the past decade. Both of these gentlemen, Saez and Picketty, have publically advocated for income tax rates as high as 75% for anyone in the higher levels of income. They have also publically stated the “wealthy” will not slow down and will continue to work just as hard whether taxed at higher rates or not. This may be true. Generally, people who work hard, at all income levels, continue to work hard regardless because it is in their nature. It is what happens outside of the income stream that becomes important.
If income tax rates return to the pre-Regan era and reach 75%, expect donations to charitable organizations to take a dramatic drop. Remember, if you take an extra 40% of available income from someone, anyone, they don’t have it anymore. It is gone to the government. Charitable organizations will need to turn to the government for support and we know how generous they have been of recent; just ask any state university or college in the nation.
Another important change will be, the increase in income tax will be reflected in capital structures and stock values. That’s right. When the government taxes income and takes it away from those that invest it in the markets, it impacts the capital markets. It is an indirect tax on investment. This will be reflected in lower stock prices that will not just impact the wealthy 1%. It will impact every 401(k) investor across the country, regardless of income level. Everyone would need to expect, and plan for lower values and dividend contributions. Bond yields will also most likely remain low as the economy will struggle under larger portions of the economy being assigned to the government and inefficient re-distribution.
So while increasing taxes on the “rich” sounds good to many, because it only costs a few, in reality, in costs many, while sounding bad to a few.