A few years ago, I played golf with a fellow who was a retired eye surgeon.
That surprised me because he was still in his 50s. I assumed he didn’t like his chosen profession.
“No, I loved it,” he said. “In fact, I was one of the best.”
So why’d he quit?
“Well, after state taxes, federal taxes and malpractice insurance, I had to fork over more than half my income every year. So I decided to just travel and play golf. I mean, eye surgery – it isn’t that much fun.”
I thought about that and asked, “So if I needed eye surgery, I’d now have to settle for someone with less talent and experience?”
“That’s one way of looking at it,” he said.
I was reminded of this conversation the other day after hearing the new tax plans offered by several Democrats.
Rep. Alexandria Ocasio-Cortez proposes a 70% top marginal tax rate. Sen. Bernie Sanders proposes a 77% estate tax. Rep. John Larson proposes an uncapped payroll tax increase of 2.4%. Sen. Elizabeth Warren proposes a “wealth tax” of 3% a year.
Not to be outdone, Sen. Ron Wyden wants to tax capital gains at the same rate as regular income, meaning rates of up to 37%.
And he doesn’t intend to wait until an investor sells. He wants to tax unrealized gains annually.
Apparently, these politicians don’t understand what happened in the past when anti-wealth policies like these were implemented, either here or overseas.
Affluent men and women aren’t stupid.
In response to confiscatory tax rates, they change their behavior, move their money, leave the jurisdiction or – like that former eye surgeon – simply quit.
After all, no one who is truly wealthy has to work or risk his money.
The law of unintended consequences doesn’t get the respect it deserves. New legislation always has unanticipated effects… often negative.
Yet many can’t wait to replace something that works with whatever “sounds good” or generates votes.
The investment incentives in the tax code were put there for a reason: to increase opportunity and prosperity.
For example, capital gains are taxed at a lower rate than earned income for three good reasons:
1) It encourages investment and productive risk-taking.
2) It mitigates the effects of double taxation. (Corporations pay taxes on their earnings, and investors pay taxes again when they sell their shares.)
3) It makes capital more mobile by reducing the “lock-in effect.” (Investors are less likely to sell and put their capital to better use if profits are taxed at high rates.)
Moreover, gains aren’t indexed for inflation.
If you invested $10,000 in a stock in 1999, for example, and sold it today for $15,000, your gain is illusory.
Even though you owe taxes on the $5,000 gain, thanks to inflation $15,000 doesn’t buy as much today as $10,000 did in 1999.
And let’s not forget that risks aren’t always rewarded.
If you bought General Electric (NYSE: GE) 20 years ago, you have a loss, not a gain. (And only $3,000 of that loss can be taken against earned income in any given year.)
Taxes are essential. They fund necessary government services. But based on envy, they can easily destroy.
Every day, affluent people move from high-tax countries to lower-tax countries and from high-tax states like California and New York to low-tax states like Texas and Florida.
That forces remaining lower-income families to pick up the slack.
When politicians promise to stick it to the big guy, they generally end up sticking it to the little guy.
Punitive taxes discourage people from starting a business, expanding an existing business or selling one business to invest in another.
The result? Less jobs. Less opportunity. Less prosperity. Less economic freedom.
If you want to know why Starbucks founder and Democrat Howard Schultz is considering running as an Independent, just look at his party’s tax plans.
They aren’t just anti-business and anti-wealth. They are anti-tax revenue as well.