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The Angry Economist

Tax Breaks For The Rich, And Why It's A Good Idea
Posted by William P. McGowan. Ph. D. on Aug 27, 2006 - 10:54:00 AM

CALIFORNIA— One of the unquestioned mantras of the Democratic Party this season is that voters should go against the Republicans because they give, and I quote, "tax breaks to the rich."  Even though we are a country defined by capitalism, somehow, giving tax breaks to people who make the most money in our society is now considered an absolute evil that must be stopped at all costs. No one, it seems, is willing to stand up for tax breaks for the "rich." 

No one, that is, except me.

The inspiration for this article came from my daughter. A high school freshman, one day, she told me that George Bush and the Republicans were bad because they "gave tax breaks to the rich." I then asked my daughter if she thought rich people don't pay taxes, to which she replied in a negative.  "Rich people get out of taxes by hiring fancy accountants."

It just so happens that in my business, I get annual updates on the personal finances of my clients, and when my daughter and I had our conversation, I just happened to have one of my client's files in my car.  

My friend Greg runs a $33 million a year construction company; he's a high school dropout who made money the old fashioned way, he EARNED it.  He drives a nice new pickup, but otherwise, you would never guess that Greg is a millionaire. 

By all of my daughter's definitions, he's the type of rich guy who hires accountants to weasel out of his taxes.   And Greg does have an expensive accountant prepare his financials every year.  The only problem with this vision of the "rich" is that my friend Greg pays taxes, lots of taxes.  

Last year, he paid over $1.5 Million in taxes.  

Which brings me to my point. The reason why "the rich" should get tax breaks is simple: they pay the most taxes.  In fact, they pay almost all of them.  According to the Internal Revenue Service, the top 1% of all income earners in this country pay over 33% of the taxes.  These folks aren't millionaires, either.  They earn more than $295,000 a year, which is a lot of money, but not the kind of wealth that allows you to go off and buy an island, much less a private jet to get there.

Now consider that more than half of all taxes paid come from the top 10% of wage earners; folks earning slightly more than $90,000 a year.  While 90k isn't shabby, it is not going to support a "Lifestyles of the Rich and Famous," either.  To politicians in Washington and Sacramento, these "rich" folks deserve the high taxes they get. Yet, no one at these pay levels considers themselves "rich." In California, it's middle class.  

The reason we really should give tax breaks to the "rich" is simple: they create the most jobs in our economy.  Nine out of ten new jobs created in America are generated by "small businesses" run by people like my friend Greg.  These are companies with fewer than 150 employees, are less than twenty years old, and tend be run by their founders.  Most important for the rest of us, when given the chance, most small businessmen re-invest in their own company.  That means they create more jobs, more payroll, and more taxes.

Too many people will dismiss this process as "trickle down" economics, buying into another mainstream media mantra.  The problem is, as we've seen time and again when "rich" guys like Greg are allowed a tax break, trickle down works.


You can reach William P. McGowan at


Cliffside Malibu




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