The idea of funding public programs by taxing the rich is nothing new. Right now, the Obama administration's plan to pay for its ambitious public healthcare plan is to tax people with earnings in excess of $200,000 – a number chosen to be safely above the middle class income. After all, they can afford it, right? (Check out our Income Tax Guide for further reading.)
Reduce Your Taxes and Work Less
While that may be true, the simple fact is that raising tax rates on the rich – or any other class for that matter – doesn't raise revenues. Taxation has a direct and negative effect on production. Simply put, the more you tax people, the less likely they are going to perform excess work. The less people work, the less income there is to tax.
Wealthy people are generally more tax conscious, and would be the first to find ways to reduce their tax burden. Whether that means shifting wealth into tax havens, earning or working less, living abroad, etc., some, though not all, will take action. There will be many who simply pay the higher taxes, but they will no longer provide the revenue the government needs. (For a related reading, check out Taking A Look At Tax Havens.)
Next, Taxing the Somewhat Rich
The inevitable step is that the tax base is expanded downwards, maybe to people making over $175,000, and the same shakeout process happens. When the upper middle class and the rich combined fail to cough up enough money, the target is lowered once more, and so on. Most of us would do the same if we knew that working less could lower our tax bill and leave almost the same amount of income in our pockets.
Goldilocks Tax and a Hungry Government Bear
There is, of course, an ideal tax rate low enough where everyone is willing to work their hardest – a tax that is "just right." But the problem with public programs - especially a long-term, expensive one like universal healthcare – and government in general is that they both expand to consume all the revenue simply because there is no reason for them not to. Politicians running programs don't get to pocket the money they save, so there is no powerful incentive to save it. Whereas, spending more in your home state can secure a lot of votes or garner donations for the next election. It's not hard to see how a tax that's "just right" would become "too little" in a hurry. (To learn about saving on healthcare, read 20 Ways To Save On Medical Bills.)
Of those who think the government can magically squeeze out efficiencies that private businesses can't, all without affecting quality, one should ask for a good example of the government doing so in the past. On the side of waste and inefficiencies, examples are not hard to find.
More For Less
Universal healthcare is possible, but it will be paid for by taxes on more than just the rich. It wouldn't rankle so much if this fact was put out there honestly and people were left to judge whether a government-run healthcare plan was worth its true price. The idea that quality won't change under government control is as suspect as the idea that the rich will pay for it. If past government performances are any guide, people will end up paying twice as much in real terms for half the quality.
For some related readings, check out The Government And Risk: A Love-Hate Relationship and What Fuels National Debt.