C’mon, Let’s Soak the Rich!

by Tom Yamachika, President, Tax Foundation Hawaii

In the couple of weeks before the Legislature’s “First Decking” deadline, legislators were hearing tax-related bills, not only the “Enola Gay” bill we discussed last week. Different tax increase bills of all stripes were being considered. The testimony in response to those bills, interestingly, contained relatively few lamentations from a beleaguered public weary of tax increases.

Rather, many testifiers were in support.

There were those who sought to punish those who were surviving – a kind of crabs-in-the-bucket argument. “It makes sense to ask those who are fortunate enough to be doing well in this economy to pay more,” one testifier said, “in order to close the deficit without slashing the critical government services that so many struggling working families have come to rely on.” Ah, so struggling working families have an entitlement? “It is time for Hawai’i to tax the rich,” another said. As if our government doesn’t do that already.

Other testifiers phrased it in terms of a moral imperative. “These changes are needed to ensure that the wealthy pay their fair share,” said one. “By asking the wealthy and profitable corporations to pay their fair share in taxes, we can prevent cuts to essential services and protect our communities,” exhorted another.

Another went into more detail, saying that the tax increases were directed at “higher earning individuals and companies, many of whom have experienced no job loss and even profited over the past year with stock market gains and Hawaiʻi’s surging real estate prices. The wealthy and corporations also got significant tax breaks at the federal level in 2017, and can afford to share more in state-level taxes.” Whether a particular taxpayer was wealthy or a corporation seemed to be enough to trigger the testifier’s ire, even though that taxpayer may have had overall losses for the year like many of us have had, may or may not have taken advantage of the so-called 2017 tax breaks, and might not have had any real estate or stock market gains to speak of. This kind of argument results when generalizations are layered on top of other generalizations. Its connection with reality fades with each additional layer.

Instead, consider this, proponents of tax hikes. Suppose your tax hikes snag a rich person. Do you seriously think that this person will just stand there and take the hit? Here are some of the things that such a person can do.

If the person is rich because he or she runs or has influence over a business, the prices of goods or services that business offers can be expected to rise. This is especially true if lots of people in similar industries are affected by the hike. If, for example, doctors are asked to cough up tens of thousands more per head in taxes, it won’t be long before the price of health care in Hawaii goes up. That bite will then be felt by much more than just the person the tax hikes are aimed at.

If the person is sufficiently fed up with, or otherwise can’t handle, the tax climate in Hawaii, he or she can get on a plane. A business can close its local branches. Our declining population numbers over the last several years and the increasing number of business closures tell us that this is not just theory. So, what happens when the cost of government is the same or greater but the number of persons paying that cost drops? The cost of government increases for those of us who are left.

In any event, taxing the “rich” can’t be viewed in isolation. Taking lots of money out of the economy through the tax system will have a ripple effect that will be felt by everyone. It’d be like shooting yourself in the foot. So, the next time you hear the argument, “Soak the rich!” ask yourself if this really is the path we want to tread.