Capital Reality

Living and working in Hanoi, Vietnam in the mid-90s, I saw first-hand the results of collectivist policies and government control. After the “American” war, Vietnamese officials used Soviet-style government planning diktats that nearly wrecked the economy in the 1980s.

As a result, the rice paddies of the Mekong Delta that were once the “bread basket” of Southeast Asia atrophied as Vietnam became a net rice importer.  Hunger and malnutrition were growing problems despite some of the richest fishing areas right off Vietnam’s coast, due to lack of fuel for fishing boats.

From those days of ideology and privation, my friends later told me a story that seemed to summarize the government’s blind and counter-productive attitude toward private capital and wealth creation.

During that destitute period, government authorities would search houses for hidden wealth. As food was in short supply, especially protein, government officials would snoop through neighborhoods in the evening, looking for the smell of cooking chicken. The logic was that if a family could afford a chicken, they had to have unaccounted wealth for the government to tax or take.

Of course, if a family was enterprising or savvy enough to get a chicken, they would go to lengths as absurd as the government to keep officials from finding a delicious chicken dish, and their precious family valuables. This insidious and self destructive game of cat and mouse went on for years, where capital and capital creation were vilified, and so much of the government’s effort was focused on finding and redistributing an ever shrinking pie.

As my Irish grandmother would have said knowingly, “you can’t bleed a stone.” The economic consequences of that policy became obvious.

You might think that such warped government policies would therefore be a thing of the past. Vietnam itself began making economic reforms in the early 1990s that have culminated in successful foreign investment in the last decade and unprecedented prosperity for its people – my friends included, I am very happy to say – natural capitalists that they are.

But apparently we are never more than a generation away from government leaders who believe that society would be both fairer and just if we simply taxed the rich more. As with Vietnamese authorities a generation ago, we are finding today in the US that the line between legitimate, progressive taxation and punishing, confiscatory taxation in the name of public policy is a slippery slope indeed.

The House of Representatives proved this thinking is alive and well yesterday by deciding to pay for vastly expanded health care reform with a staggering tax on the wealthy. Beginning at 1% on incomes $350,000 ($280,000 for singles), it would increase to 5.4% for incomes of a million dollars or over. The surtax would provide $544 billion for health care over ten years in one of the largest transfers of wealth in American history.

But what exactly does this mean for Americans and America?

For a moment let’s put aside the fact that the top 1% of wage earners in the US already pay 40% of all federal income taxes, while the bottom 50% pay less than 3%.1  The fact is, we know who these people are. The Internal Revenue Service (IRS) helpfully publishes a list of the 100 wealthiest zip codes in the United States.

From the list we see that the truly wealthy zip codes start at the bottom with income at $333,000 in (surprising) Indianapolis, Indiana and goes up to $2,977,000 in New York City. So, the new tax encompasses these 100 zip codes and more.

All totaled 27 states have zip codes that fall into this mega-wealthy category. New York has the single largest number of zip codes at 27, followed by California with nine, Florida with seven, then Texas at six and New Jersey at five.2

But the data takes on new meaning when we correlate the zip codes to individual congressional districts and see the States and whose constituents are going to pay.

Perhaps counter-intuitively to some, 81 of the 100 zip codes are represented by Democrats.  Republicans, the supposed Party of the rich, only hold 19 districts with zip codes among the wealthiest.

Representative Carolyn Maloney of NY’s 14th District, which encompasses Manhattan and Queens, has the largest single number of zip codes for a District on the mega-wealthy list with 18.

Freshman Democratic Congressman James Himes, who represents the 4th District of Connecticut in affluent Greenwich, just outside of NYC, represents the single largest number of filers in a district in the mega-rich category; 7,465.  The leaders on the list are as follows:

Mega-Rich: By Congressional District

* IRS and House of Representatives websites
* Blue for Democrat/Red for Republican

These are the people, by and large,  that the Democratic leadership of the House of Representatives believes can afford to finance healthcare for the rest of the country.

Aggregating the data, California is by far home to the highest number of mega-earners. All totaled, five Representatives have zip codes in their districts representing more than 19,000 mega-wealthy. New York comes in second with four Representatives and more than 7,900 filers.

Now here is the paradox.

Despite their extraordinary wealth, both California and New York are in deep budget crisis. California has been forced to hand out IOUs for lack of adequate funding. In New York, a $132 billion budget was approved that included huge tax increases and a 9% increase in spending, despite a projected revenue decline of 32%. Consider New Jersey, which is reputed to be the highest taxed state in the Union with its 3,100 mega-rich filers and still Governor Corzine raised taxes by over $1 billion. In each of these states, high state levies have sapped growth and caused population exodus while government programs have expanded.

Simply put, bilking the rich is not a panacea for either program expansion or budget balancing. In fact, it is an indirect tax on capital creation and deployment that ultimately retards economic growth and accelerates decline, as New York and California can attest.

As the Washington Post delicately stated, “sharp increases in marginal tax rates of a very narrow band of America could distort their economic behavior.”3

Colin Powell, one time Secretary of State and new found Democratic toast-of-the-town was more direct in 2002 when talking about investment in developing countries when he said:

“Capital is a coward. Capital will go to where it is going to be safe, where it can find a return on its investment. It will fee from bad policies, it will flee unpredictability…”4

And if Congress moves ahead with its surcharge to expand healthcare, those mega-earners are going to flee to places that value capital investment and wealth creation.

Tax revenues are as dynamic as the taxpayers themselves, responding as appropriate to incentives and punishments.  Let the Bush tax cuts expire and add a surcharge to the mega-rich and in a blink, you’ve increased the tax bill of some very hard working Americans by 36% or more.

Consider for a moment if that was you.  What would you do?

The illusion for the Statist is that capital is fixed and will remain regardless of how it is treated. But the dynamic reality is that under tax assault, the US not only loses investment dollars that would otherwise be available domestically, but in the out years, when the tax increases kick in, it loses the actual source of funding for Obamacare, with the additional, catastrophic rivers of red ink that this would entail.

Hopefully a fully wakened America will see the folly of this coming debacle and stop it in its tracks by demanding action now. If you’re unimpressed, throw the bums out in 2010.