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How to Be a Patriotic Millionaire, Even if You're Not Rich

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It's not enough for you to call for more taxes; you need also to pledge that you will work the same amount at the same rate, accepting the lower after-tax income cheerfully.

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MINYANVILLE ORIGINAL More and more rich people seem to be writing op-ed pieces asking to be allowed to pay higher taxes (Warren Buffett, for example). The appeal for the authors is obvious. Normally you have to spend money in conspicuous consumption to advertise your wealth. Simply telling people you are rich is not convincing, and is immodest. Writing an opinion piece is free, and the glow of your self-sacrifice erases doubts and complaints.

In fact, you don't even have to be rich.

In most cases, if someone claims a qualification to give his views more weight-a war hero who is against a war, an art expert who says a painting is a forgery, an investor who relies on his successful track record to get you to invest in his mutual fund-that person is expected to provide proof of the qualification. But when people challenged Warren Buffett (who no one doubts is rich, but who some doubt pays as low taxes as he claims) to release his tax returns, he gave selected data, which were insufficient to determine the question. As far as I know, no other "patriotic millionaire" has even gone that far.

Another great thing is that as you smother yourself in credit for generosity and patriotism; it doesn't cost you anything, since your writings are not likely to affect the actual outcome. And even if they do affect things, because our tax code is so convoluted, it's easy to call for tax increases that don't affect you.

If, like Warren Buffett, your low taxes result from running your business through a tax-advantaged insurance company, taking most of your income in the form of long-term capital gains, and fighting the IRS over $1 billion of back taxes it says you owe-call for higher taxes on ordinary income. No one will question the details, in fact, Buffett actually calls for lower taxes on the long-term capital gains he enjoys. If you have a lot of wage income, call for higher taxes on dividends and capital gains. If you live in a low-tax state and don't have a home mortgage, call for capping deductions.

Although everyone should take advantage of this free opportunity for self-promotion, there are some pitfalls to catch the unwary. You have to think your story through carefully, or you'll anger the people you're trying to pander to.

First you have to consider two fundamental principles of taxation: That the person who writes a check is not necessarily the person who pays a tax, and that raising a tax rate does not necessarily increase tax revenue. An example of the first point is the employer half of payroll taxes seems to be passed on to employees in the form of lower wages, and the same is true for the cost of all labor regulations. In fact, all taxes on companies have to be passed along to workers, customers, or investors. An example of the second is the corporate income tax, all the revenue of which is given away in tax preferences for various politically-favored corporate activity, and the reduced marginal personal income tax rates for dividends and capital gains that are set to avoid double taxation.

Generally when you raise taxes on something the price to the consumer goes up, and less of it is supplied. This, in fact, is the entire theory behind sin taxes on things the government dislikes. But that's no good in this case. You're calling for higher taxes on yourself, not taxes you plan to pass along to others. And you want this to result in more revenue for the government, not less. So it's not enough for you to call for more taxes; you need also to pledge that you will work the same amount at the same rate, accepting the lower after-tax income cheerfully.

The importance of this cannot be overstated, as this is your major contribution to the people who want to raise taxes. Mainstream economists admit the economic principles above, and so have to debate the level and type of taxation that actually will fall on the rich and actually will result in increased revenue. This is complicated and sometimes professional principles conflict with political desires. You are in a position to offer cover as you understand you and all the rich people you know will not respond to economic incentives at all. A mainstream economist would be embarrassed to claim this, but you have no professional credentials to impair. In fact, you should be careful to claim that you have no understanding of economics as it is the only way to make your assertions credible.

Leftist economists see the world differently. They tend to regard income of rich people as the result of fraud, cronyism, or monopoly, and they do not believe the world would be worse off if you provided less of your services. A monopolist sets price and quantity to maximize profit; the government taking a bigger slice does not affect that decision. From the leftist view, saying you won't charge more or work less if taxes go up is an admission of your parasite status. If you refuse to do this, you need reeducation and will get no credit for your misguided counter-revolutionary appeasement attempts.

We're halfway home, but we now have to consider the expenditure side of the ledger. You have to claim that you will end up with less money after the tax increase, for the reasons above. You can do three things with money you make-you can spend it, invest it, or give it away. If you have less money, you have to cut at least one of those three.

Funding government overspending by robbing charities is not a popular position. It's also not efficient; in many cases, reduced private giving requires increased government expenditure. Reducing investment makes no economic sense. If you invest a dollar, it is spent, and the government collects a share in taxes. You also believe it will return more than a dollar to you in risk-adjusted net present value, generating more taxes from you, and from all the employees and suppliers of the business. If the government extracts a dollar from you that you would otherwise invest, it hurts you, it hurts the economy, and the government ends up with fewer dollars in the end. It's just another form of borrowing, and a particularly expensive and destructive one.

The whole point of your proposal is to increase government revenue and not government expenses. The only way to do that is to reduce your spending. Of course, that cuts government revenue as well, since any money you spend is taxable income or profit to someone else, and state and local governments collect sales taxes, but the net effect of paying money in taxes instead of spending it is still more money for the government. So you have to pledge to cut your spending by the amount of your increased taxes.

Unfortunately, we've created a dilemma. Tax-and-spend liberals have no problem-you spend less, the government spends more. But patriotic millionaires call for spending cuts and entitlement reform in addition to tax increases. You plan to work and invest the same amount, which means you need the same total economic demand, but you are spending less and the government is spending less. Who will spend more to make up the difference? The middle class? They'll have to borrow the money to do it, recreating the problem that led to the financial crisis. Moreover the effect will be for the government to reduce the deficit by converting it to personal debt of middle class taxpayers. This plan will win you no friends in the blue states.

You could hope for foreigners to increase their imports from the United States, but no one seems to know how to manage that. Increasing taxes to force up the cost of production in the US will work in the opposite direction. Also, if the US cut spending and raised taxes it would increase the value of the US dollar, which means we would likely see more net supply from foreign countries, not more net demand.

There is only one time-tested solution for this problem: War. War increases spending and creates opportunities for colonialism, in which you force people in other countries to buy your goods. You don't actually have to fight; you can just stir up trouble in other places and then sell weapons. History has many examples of successful prosecution of the war strategy. Unfortunately, this is also unpopular in liberal circles.

The only politically correct resolution is to call for government spending cuts in the far future, but spending increases in the present and foreseeable future. This does not have the proven track record of war; on the contrary, it has been tried often, but has never worked. However, that's not your problem. All you have to do is keep your proposed spending cuts small and vague (use words like "reform" and "rationalize" rather than "cut"), or better yet, don't specify them at all. When everything falls apart, blame the unpatriotic millionaires. Everyone else will.

So that's how to write your patriotic millionaire op-ed piece. Call for increases in taxes you don't pay, and promise that you and all the rich people you know will not demand higher pretax wages or investment returns, nor work any less. Promise that you'll pay for the entire tax increase by cutting personal spending, and call on the government to do vague things like "get its house in order" and "come up with sustainable entitlements." Remember that in Washington-speak, an unenforceable promise to grow future spending at a slower rate than previously planned is a spending cut. No one actually has to spend less than the previous year.

There is one final point. You have to make some kind of a pitch for "balance" between spending cuts-sorry, make that entitlement reform and rationalized programs, and tax increases on the rich. No sensible person will disagree with you. The US has a $16 trillion official debt and a much larger unofficial deficit composed of unfunded entitlements, contingent liabilities, and legislated liabilities. The poor cannot pay it off; they don't have the money. No middle class in a democracy has ever paid more in taxes that it has received in direct benefits-that is, cash or things like education and health care that it would purchase out of pocket if not provided free by the government, not general societal assets like roads or military protection. So the middle class will at best pay for its own entitlements, it will not contribute to paying down the debt, or even to paying the interest on that debt when interest rates go up.

If that sounds anti-middle-class, it isn't. The middle class does most of the work, fights most of the wars, raises most of the kids, and supports most of the social institutions. The poor often work hard, but generally at things with little economic value. Some rich people work hard, but they choose to, which is quite different from struggling to support a family. The middle class need make no apology for its contribution to society. However, it will never vote to tax itself unless there is a clear, direct benefit in return. Why should it? Majority rules.

So the rich will have to pay off the debt. It's that or allow default, and the rich lose more in a default than anyone else. A few rich people may renounce citizenship or go on strike, but those are foolish choices. Being a rich US citizen is pretty nice, even if you have to pay a lot in taxes, and something to be proud of.

What's important is the order. The first thing we need are honest accounts that include all government promises: Federal, state, and local. No one will dig deep into her pocket to pay off a black hole debt. We can't have a rational debate with each side making up its own figures.

Honest accounts mean more than just guessing Social Security revenues and payouts in 2040. It means agreeing now what we will do if reality differs from projection (and it will). Will we pay the highest benefits we can afford given the revenue? Will we raise revenue to whatever it takes to pay promised benefits? Will we split the difference? Will we borrow to cover shortfalls, and if so, for how long before we change the rules? Agreements based on dishonest accounts are worthless. The last thing we need is more sign-now/fight-later budget deals.

Next we have to cut spending to a level that is sustainable in the long term. As long as we are overspending, increasing taxes just enables continued bad behavior, and it wastes economic resources that will be needed in future to pay off the debt (including Social Security, Medicare, unfunded pensions, losses at government sponsored entities, interest on the debt, and other items).

Reasonable people will differ about what that level of spending is, but no reasonable people should call for exhausting ourselves bailing out the boat before the leak is plugged. And no reasonable people should look to increasing taxes on the rich to pay for middle class entitlements; the rich have all they can handle to pay for the poor, general social infrastructure, and debt repayments.

Once we have achieved stability in normal taxation and spending, the rich will face stiff tax increases to pay off the accumulated debt. Some will complain, no doubt, but the reasonable ones will realize these taxes are in their self-interest. On that day, I will not wax sarcastic if some rich people write editorials to support higher taxes.
No positions in stocks mentioned.
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