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The Enormous Cost Of Taxing The Rich

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Imposing additional taxes on the rich sounds like a good idea and has been a very popular rallying cry among many politicians and voters. Yet, each time governments attempt to implement a wealth tax, the result is actually less tax revenue.

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The Argument Of Taxing The Rich

Arguments to tax the rich come from the misplaced notion that the wealthy among us take money from everyone else. This is untrue. Wealth creators represent a small minority who are willing to put in tremendous amounts of work and take enormous risk in the hopes of both monetary and societal rewards. They are multipliers of wealth and actually create more money for society.

Among the failed taxes on the rich was President George H.W. Bush’s 10 percent tax on expensive boats, cars, watches and other items deemed luxury in 1991. The goal of the tax was to generate additional revenues to reduce the federal government’s budget deficit. He believed it would raise $9 billion in excess revenues over a five-year period. It did the opposite.

The Washington Post set out the facts in a July 1992 article, “How to Sink an Industry and Not Soak the Rich.” It chronicled the damage done to the boating industry. The rich, unhappy about paying the new tax, stopped purchasing luxury boats — among other luxury items — and the federal government was unable to incur its anticipated tax money. In fact, in its first year and a half, the new tax raised a pathetic $12 million. In the meantime, it devastated a number of domestic industries, including boating, jewelry, and private-plane manufacturing.

In August 1993, President Bill Clinton eliminated the luxury tax in an attempt to reverse the damage and start rebuilding the lost businesses, jobs and tax revenues from the industries and communities decimated by the luxury tax.

A Flop Idea In Europe

Efforts to tax the rich in European countries were epic flops. For example, France implemented an annual tax of from .5 to 1.5 percent on everything owned by the wealthy. The new tax was expected to raise billions of Euros, but instead it triggered a sizeable migration of wealth creators and entrepreneurs from the country, who took with them their money, businesses and major sources of revenue for the country.

France’s wealth tax raised about US$26 billion while the government lost more than US$125 billion each year from the departure of wealth creators. President Macron cancelled the tax in 2007, saying, “It’s all well and good to want to spread wealth, but you first need to produce, to create wealth before redistributing. That’s how it works.”

Uganda imposed the most audacious measure when, in 1972, it expelled its Asian wealth creators, and took everything they’d created and redistributed it. The government seized more than 5,650 business, farms and ranches and reallocated them to Uganda’s citizens, with some going to the government directly. The expulsion was insanely popular with Ugandans who had thought that the rich had taken advantage of the masses. It was like winning the lottery. But, as lottery winners rarely hold on to their money, the majority of Ugandans were worse off two years later.

Uganda’s leadership overlooked how the rich created jobs that provided people with income. They paid taxes that funded the building and maintenance of roads, hospitals, schools and other vital infrastructure. They didn’t understand that creating wealth is hard work, and not everyone is willing or able to do it. The economy collapsed in 1979, taking the Idi Amin government with it. His successor promptly invited the Asian business community back, but the damage was already done.

Today’s rallying cry to impose greater taxes on the rich is counterproductive. In my native country of Canada, 10 percent earn over CA$100,000 per year, yet they pay more than 50 percent of the personal taxes used to fund schools, hospitals, roads, fire fighters and other services. They carry more than half the burden of taxation for the other 90 percent of Canadians who enjoy those services.

Nations must encourage successful companies and entrepreneurs to stay and grow. To do this, it’s crucial to curb the false promise of further wealth taxation that generates disastrous results when governments are foolish enough to enact them.

About the Author

Derek Bullen is Founder and CEO of S.i. Systems, one of the largest professional services companies in Canada, with thousands of information technology consultants working on projects for blue-chip corporations and government agencies across Canada. His new book is In Defence of Wealth: A Modest Rebuttal to the Charge the Rich Are Bad for Society (Barlow Books, 2022), and previously published High Velocity, a book to help new IT professionals develop their soft business skills. Learn more at https://bullenbooks.com.