Raising taxes on the rich seems like a great idea politically, socially, morally, and economically. Our country has huge debts, failing social programs, and a slowing economy. So, it seems only fair and reasonable that we should get help from those who can afford it: rich people, right? Wrong.
Ken Langone, the CEO of Home Depot, said on CNBC, “raise my taxes, go ahead. Nothing will change in my life...”THAT’S PRECISELY THE POINT!!! His life won’t change, but someone’s will. The question is: whose life will change?
Life Will Change for the Less Fortunate
Life will change for the people who depend on the capital that Mr. Langone saves and invests: entrepreneurs and small businesses. If you want to borrow money to start or expand your business, or to buy a home, you borrow from a bank or lender who attained their capital from a rich person. If you tax rich people more, they don’t spend less (duh!): they save and invest less. That makes borrowing money harder for the little guys because banks have that much less capital to lend out. So Mr. Langone is half-way to the right answer, but then veers in the wrong direction.
Langone proved my point when he said this: “In reality I don’t believe people making a million dollars a year are gonna do anything different in how they spend money if they pay more taxes. A person making a million dollars will pay the higher tax and will still spend as much money.”
Again, he's right, and that’s PRECISLEY the point. Rich people will spend the same amount, but save and invest less (Rand Paul failed to make this point in response to that comment in the video above). Mr. Langone is obviously economically challenged (like everyone else). And we understand here at HNW that saving and investing (in capital projects) drive the economy, not borrowing and spending (on consumption).
When rich people, like Mr. Langone, put their money in banks (lending institutions) and investments, entrepreneurs and small businesses attempt to make products for which there is future consumer demand. This leads to a higher standard of living for everyone. This means cheaper toilets, cheaper cell phones, cheaper healthcare, and cheaper everything. If you tax Langone more the way we tax today, he won't cut expenses, and his taxes will be paid from money that otherwise would have been saved and invested. So, his life doesn't change, but borrowing costs will be higher for everyone.
The more we incentivize spending, the worse off we are, because we're incentivizing the current (relatively expensive) way of doing things. We should wish for rich people to keep producing, keep underconsuming (rather than lavishly spending on useless things like yachts), and keep making life better for everyone else by saving and keeping their money in the hands of those willing to lend it out for profit. That means we should tax their spending, not their savings. A higher tax on income/investments merely taxes those who depend on the capital of rich people, which is everyone else.
"But the Government Will Put That Money to Good Use!"
Some will argue, with a straight face, that even though taxing the rich means less money to be lent out to entrepreneurs, it's all OK because the government will spend that money on much-needed programs: social security, medicare, etc. A rebuttal of this argument will get its own post here, so I'll just say that fortunately, the general public and even some politicians are beginning to understand that these programs are unsustainable because they incentivize detrimental economic behavior.
Thanks, Mr. Langone!
So, while Mr. Langone can pat himself on the back and sleep well at night, he's actually advocating a policy (taxing the rich) that would hurt the poor, and the overall economy. The rest of us suffer because he is a moron, like most others, including our politicians and policy-makers, when it comes to basic economics. Hopefully people like him, who were smart enough to make their money in the first place, are smart enough to eventually come to their common senses. We can only hope.