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As the political season here in the US heats up, I’m gettingly increasing tired of hearing all this propaganda about how the wealthy in the US hardly pay any taxes. It’s untrue and it’s being used to promote an agenda that is causing active harm to our economy.

There are virtually no wealthy individuals in the US paying less than 35% of their income in taxes.  When people say that wealthy individuals are only paying 13% or 15% of their income in taxes, they are being very selective in what they count as “taxes.”  The top 1% of earners in the US pay something like 40% of the Federal tax burden.

The main reason people are able to get away with this mistruth on taxes is that they like to pretend that the only tax that exists is the Federal Income Tax. It’s not. There’s double taxation on corporate profits in the US. There’s a corporate tax and a capital gains / dividend tax. The corporate tax rate is 35%. The capital gains tax rate is 15% (and increasing to something like 21% under Obama’s proposals). Then, you have to factor in state taxes, which might be about 5% on corporate taxes (average) and 5% on income taxes.

So if you make a $1,000,000 profit, you pay 40% corporate tax, which gives you $600,000 left for personal taxes. Then you pay 15% capital gains, which is another $90,000. Under new Obama proposals, it will be closer to $120,000, so that leaves you with about $480,000. Then, you have the 5% on the state level (as an average), so that’s about $24,000, so now you are down to $456,000. If you are unfortunate enough to live in California or Illinois, that state income tax is over 10%, so that’s another $24,000, and you’re down to $432,000.

So while the President might like to insinuate that the rich are paying 15%, that’s based on extremely flawed logic. That’s now how the tax system works. On average, someone making $1 million in profits is paying around 50% – 60% of their true income in taxes; not 15%.

Regardless, it doesn’t matter, because even if we taxed rich people at 0%, it still wouldn’t make the case as to why the Federal government is more effective at investing that money than the private sector.  Personally, I trust entrepreneurs and business people to invest in new technologies, create jobs, and improve our society, much more than I trust the Federal government.

And this is the real danger behind this rhetoric. By demagoguing the wealthy, we’re ignoring the fact that individuals and businesses tend to invest their money much more wisely and effectively than a large centralized bureaucracy (i.e. the Federal government) does. Every dollar in taxes we implement, is a dollar taken away from investment in some other area of the economy. Whether we’re talking about an entrepreneur starting a new business, or a middle income family sending their kid to college; taxes take money away from those vital functions.

Our Federal budget deficit is a problem for a reason. The Federal government has wasted our money. They have invested in inefficiently, and they have not provided us with proper returns. While the President frequently talks about “roads and bridges”, highway spending is only 1.1% of the Federal budget (and shrinking due to the entitlements).

Call this a random rant if you will, but I hate to think we’re going to fall into the same trap that so many European nations have fallen into — believing that high taxes are some cure-all for all societal ills. High taxes don’t result in more “equal wealth”. They result a society that is incapable of creating wealth; and therefore, makes everyone poorer.