Tax Rates Set to Become a Divisive Issue In 2020


Democrats and Republicans traditionally disagree on matters of taxation, with Republicans preferring less of it and Democrats more. This divide may be bigger than ever now.

One of the governing principles of modern governments is that those who earn more must pay more, not just in terms of nominal amounts but also pay a higher percentage of their income in tax.

While there are ways around this, for the most part this principle does have its effects, and those who make more are subject to paying more tax. Where the battle lines are drawn here generally is how much higher of a percentage that higher earners are subject to.

If we approach this from a more libertarian perspective, we could easily say that escalating tax rates are simply unfair, and enforcing this under the power of law is an abuse of power. This presumes that government actions need to be or should be justifiable, rather than simply twisting people’s arms enough to make them do it.

Some feel that all taxation is unfair, but if we have organized governments set up for the greater good, or at least one that is supposed to pursue this interest, someone has to pay for this. Governments without funding cannot operate, and we cannot just rely on voluntary donations.

Therefore, it’s not hard at all to justify mandatory taxation of some sort, as everyone does benefit in some way from this. There are some that believe that this should be confined to things like public works and security, the things that are required to manage an orderly society, but many others believe that this should be extended to a much bigger scope, like the roles that governments actually partake in.

We Need to Seek the Proper Balance Between Taxation and Prosperity

The principle of taxing people on the percentage of their income, rather than a lump sum being due for everyone, is an entirely socialist principle in itself, but we are to a large degree a socialist society, so this all fits. This principle becomes further expended when we implement escalating tax rates, and especially when we seek to increase these upper rates.

All taxation contracts the economy in the aggregate, even though it does serve a redistributive role. We need to balance these two interests and do so in a considerate way. While it may seem like a nice idea to some to just put up rates, making those with the means to pay more do it for the benefit of the majority, these decisions do have real practical consequences.

Both the Republican and Democratic parties are based upon socialistic policies to some degree, although Democrats clearly embrace socialism more than Republicans do. This extends to both how our money is to be spent and how we are going to raise it, with socialists much less reluctant to show restraint in collecting more from those who have more.

President Trump’s tax cuts of 2017 were therefore met with considerable disfavor among Democrats, who see this as moving in the opposite direction from what they wish to happen. They have met this with several attempts to get the wealthy to pay even more, including both wishing to raise their tax rates, place an annual tax on wealth, and even tax securities transactions.

Whenever we look to propose such things, we do need to maintain a clear view on not only how well these things would work, but what effect this would have on the economy. Higher taxation of any sort takes money out of the economy, and whenever you are seeking to take a lot more out of it, this can have some big consequences that we should not want.

While some of the further out ideas that have been proposed by the more socialist Democrats may not be realistic, any tweaking of the current system needs to be carefully considered. We cannot just seek to polarize things by pitting the majority against the more well-heeled minority, and say that since the majority benefits and only the majority suffers a little, this makes this a viable option.

Increasing Taxes Too Much Really Hurts Us All

What can happen from these ideas is a situation where both the majority and the minority get hurt, which is what tends to happen if you shrink an economy too much. People complain that not enough trickles down from the wealthy to the rest of us, but some does trickle, and when you reduce this, you get less trickling and end up with things like a lot less jobs and a lot less money to go around, where even the government shares in the extra burden that is created.

This cannot be the goal of a responsible government, so we need to make sure that we restrain ourselves enough so that we do not use this power too irresponsibly.

Government spending is actually not very constrained by tax revenues, and we spend a lot more than we take in, and aren’t even that concerned about how much debt is piling up as a result of all this.

We do know that if we put ourselves in a recession, this involves our government spending a whole lot of their own money to look to correct it, just like we saw in 2007-2008. The central bank will also do much to lend a hand here, and all of this, ironically, is to look to reverse the impact of this contraction. It’s just better to look to avoid these things in the first place, and certainly to avoid creating the problems ourselves.

The current state of the economy is particularly ill-prepared for any sort of dramatic tax reform, and probably cannot stand even more minor ones without increasing our risk of a recession unacceptably.

While two thirds of Republicans now see the tax system as fair, only a third of Democrats do. Should the balance of power continue to shift to the Democratic side, including one becoming president in 2020, we are risking allowing tax reforms that may not be healthy at all for the economy coming to pass.

The average American does not understand the dynamics of this situation very well, until it hits them in the pocketbook of course. This is to be expected, as we don’t even teach basic economics very much, and this is also an area that most people don’t have a particular interest in.

All they tend to see is tax cuts making it seem like wealthy people are being advantaged, and don’t see the connection with their own lives very well. It is not so much that we are giving these people a break with these tax cuts, it is more that we are looking to cut down on the additional burden that we put them under, which often can indeed be to advance the greater good.

This might be something more appropriate if we are looking to rein in inflation, and at least this would make the contractionary effects of these tax increases at least strategically sound. When we look to bring in these changes at a time where they would not be welcomed, like right now, we are actually acting without due care.

As we await the results of the 2020 U.S. federal election, we can only hope that the zeal that some politicians have to punish the rich more will be tempered enough by practical considerations to prevent us from expressing this anger in a way that would be harmful to not only the elite, but all of us.

The potential is certainly there to mess things up if we want to, requiring a costly government response to try to rectify the damage, but we can still hope that it doesn’t come to this and any changes that are made to our tax code will be modest enough to avoid all of us getting bashed in the aftermath.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

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