obama Declares War On Success

I am not a millionaire - yet.

I am, however, bound and determined to keep working and applying myself to become successful, to be able to provide for my family and descendants, and to be able at some point to enjoy a few of the finer things in life.

In the eyes of comrade obama that makes me an enemy of the state.

In last night's State of the Union address obama declared war on success, calling for a 30% tax rate on people who make more than $1 million per year. It is crass political pandering and feel-good policy at its worst, with blatant disregard for the facts.

IRS tax rates already tax earned income over $380K at 35%, so obama's proposal is clearly aimed at income resulting from capital gains, which currently are taxed at 15%. However, that 15% is the second bite from the apple. Those dividends and capital gains have already been taxed at the corporate level. 

Nobody seems to ask the question why dividends and capital gains are taxed at preferential rates. The simple answer is that they have already been taxed once, and their seeming tax breaks are applied to income being taxed a second time.

Dividends are paid out of after-tax corporate income that already has been taxed at rates as high as 35%. Capital gains are generated by income from investments, which come out of savings. The savings come from income that already has been taxed but not spent.

In other words, the corporation (hopefully) generates income, which is taxed at the corporate level. The individual invests in the corporation, using  money that has already been taxed at the individual level.Any dividends or capital gains resulting from the corporation being successful (which, keep in mind, is not a given) are then taxed again. An example:

A millionaire rock star who squanders all his income on high living is taxed once. An entrepreneurially minded rap star who prudently sets aside some earnings and invests them in enterprises that make headphones or fashions, which create wealth and jobs, is taxed a second time on the dividends and capital gains that may eventually be generated.

So would someone please explain to me how taxing the investor and the entrepreneur will create jobs?

There's also the so-called 'risk premium' to consider. Investing in stocks or start-up firms carries risk. Prudent investors expect that, as risk goes up, so does their potential return. Remove that risk premium and capital will flow from the stock market to low-risk instruments such as municipal bonds (which, by the way, are tax-free).

Whatever they (the 1%) do, they won't stand still. Rich folks have the flexibility to rearrange their affairs, unlike working stiffs. So, they pick up stakes and move from high-tax states to low-tax domiciles. And they have accountants, lawyers and other advisers whose livelihood depends on helping their affluent clients keep what they have out of the clutches of the tax collector. That only stimulates income for those advisers instead of the economy at large.

The alternative is to scuttle the present abomination of a tax code and replace it with a broad, simple one that captures more income at lower rates and with fewer exclusions. That was not on the agenda of the State of Union, however.

That last point bears repeating. The simplest and most effective way to ensure 'fairness' in our tax system is to throw out all the special interest provisions, deductions, and exclusions that make the existing tax code unintelligible. The 2011 U.S. tax code is 72,536 pages long, and growing. Someone who has the wherewithal to hire a stable of accountants and tax attorneys is obviously going to find loopholes and deductions that are beyond the reach of the average taxpayer.

But "Revise the Tax Code" doesn't have the same political appeal as "Tax the Rich"...