Soak the Rich, Hurt the Poor

With the Fiscal Cliff™ fast approaching — the one the U.S. government went over a long time ago — the kabuki in Washington and its media have largely ignored the effect tax increases will have on the economy. A few Republicans have alluded to the problem, but as I noted a few weeks ago, the conversation has centered on what each group must do to pin blame on the other.

Peter Schiff and Tom Woods have each pointed to the fallacy of the blessings provided by the 91% tax rates of the ’50s. In short, few Americans actually paid those rates, so any benefits supposedly brought on by them must have some other cause. But there’s another component to taxing the rich that should be considered, along with the 91% myth. Taxing the wealthiest members of society ultimately harms the poorest.

Because the wealthy overwhelmingly invest in capital goods — which make the production of consumers’ goods possible — reducing their income will tend to lower the overall amount of capital investment. The effect of diminished capital investment is that fewer consumers’ goods will be brought about, and therefore the standard of living for all income levels will be lower than they otherwise would be.

This will disproportionately affect the poor, who will have to spend a higher percentage of their income on things like food, clothing, energy, etc. While it’s true that wealthy individuals will also have to spend more on these items, they can more easily afford to do this without sacrificing other necessities.

Consider the price of gasoline. CNN reported last year that the average American spent $368 a month on gasoline, or 9% of their annual income. Decreased investment in gasoline production will mean, all else equal, that prices will stagnate and, in the long run tend to rise, as capital wears out and is replaced at lower rates. This is particularly true as long as global demand for fuel continues to increase. Rising gasoline prices always harm those with lower incomes before they affect wealthy individuals, who have more disposable income with which to spend on transportation.

The same will be true of other industries; lower amounts of capital investment will put upward pressure on prices as demand continues. It’s also important to note that increased capital investment often leads to the lowering of prices, which allow for everyone’s standard of living to improve. Increasing taxes on the rich creates a barrier to this rise in living standards, so for anyone who wants to help the poor, advocating lower taxes for everyone is a sure way.