Taxes: The New Opiate of the Masses

Politics isn’t one of our big topics here at Wealth Daily, but occasionally an issue arises from the political sphere that is so potentially influential on everything — the world of finance included — that not talking about it is neglectful at best and reckless at worst.

Today, there is a growing trend in the U.S. building behind one specific presidential candidate — a candidate whose rhetoric has won him a growing legion of followers.

So much so, in fact, that his political rallies are enjoying unexpectedly high turnouts, with some venues actually overflowing with his supporters.

If you haven’t figured it out yet, I’m talking about Democratic front-runner and self-proclaimed “Democratic Socialist,” Vermont Junior Senator Bernard Sanders.

His fans, though, just call him Bernie.

Given his self-applied political stance, it’s not a surprise that Sanders’ most salient point thus far has been his opinion on where taxation should go.

In his highly animated speeches, Senator Sanders doesn’t specifically say how much he wants to raise taxes on the top tax bracket (read: top 1%), but he hasn’t ruled out going as high as “90%.”

That’s not a typo, folks. He actually said that if a 90% tax on income is what’s required to set this country on a path to fiscal and social equality, “so be it.”

There is no crueler tyranny than that which is perpetuated under the shield of law and in the name of justice.

— Charles de Montesquieu

His plans also include dramatically increasing estate taxation, as well as increasing corporate taxes and closing many of the often-referenced loopholes in tax laws across the board.

Of course, this gets his predominantly 99-percenter constituency going fairly quickly — but not because any of them did any overwhelming amount of research on tax rates and their resulting effects on the national economy…

In fact, historically speaking, over the course of the last century, our federal income tax system performed more efficiently when top income tax brackets were paying no more than 40%.

It happened at the start of the Bush era, when the maximum tax rate for individuals earning about $288,000 per year was no more than 39.6% on income exceeding that threshold.

That level, established under Clinton, handily outperformed ratios from preceding decades when maximum tax rates were into the 60%, 70%, and even 90% range, as they were during post-WWII years.

However, explaining this to the torch-bearing hordes might not be of much help because it’s far simpler and more intuitive to make the connection between the financial excess of others (as is quite conspicuous all around us) and personal lack of fortune.

Three days ago, the Wall Street Journal estimated that the total cost of what Mr. Sanders proposes to do in terms of public spending will amount to between $15 and $18 trillion over the course of a decade.

Click Chart to Enlarge

That’s almost twice as much as we’ve added to public debt since the beginning of the last presidential tenure, which up until now has been by far the greatest period of government spending in American history.

His supporters have already rebutted that premise, however, stating that while this may be the figure required to fork over, the resulting benefit to the economy would wind up cutting costs in the end and setting the budget back into balance.

That is, of course, because both Sanders and his collective are counting on added tax revenues to foot the bill until the expected economic gains start flowing in.

So it’s money well spent… It just doesn’t belong to the prospective spenders just yet.

Supporters of this “all for the better good” mindset often cite the fact that the American economy flourished when top tax rates peaked in the 90% range — the postwar period between the mid ’40s and mid ’60s.

What this theory fails to consider is that during this period of time, the U.S. was also producing 75% of the world’s manufactured goods and was thriving while the rest of the world’s military and economic powers tried to recover from a devastating global conflict.

But again, there is no need to get too into the facts when the answer is so simple…

Tax the rich.

And that’s where the situation becomes truly problematic for American civilization at large.

Trickle-Down Economics? Try Trickle-Down Bankruptcy

You see, as defined by the tax laws, to be “rich,” you hardly need to be wealthy.

At the moment, to qualify for the prestigious top federal income tax bracket, you need to make just over $405,000 per year as an individual and about $460,000 per year as a couple.

That sounds like a lot, but between the 39.6% federal income tax rate and the average state tax rate, these individuals would be giving away roughly 50% of their income past those thresholds.

Those right at the cusp would be giving away less, but still a substantial amount. An individual, for example, making $420,000 per year of raw, non-capital gain, taxable income would still be paying out $125,000, or about 30%, to federal income and another $40,000 or so to state.

Total liability: about 39%.

For people making more than this threshold amount, however, the liability grows rapidly with the income.

An individual making $800k/year would end up paying $276,000 in taxes, or 35%. With state taxes added, we’re now at 44%.

The more you make, the more you pay on a level disproportionate with the rest of the tax brackets.

And that’s the idea, because the presumption is that the more you make, the more “expendable” income you have — the more you can contribute.

I know I haven’t shocked anybody’s sense of justice just yet, but there’s another part to this scenario…

You see, while people who make $420,000 per year or $800,000 per year or even a million per year might suck it up and deal with tax rates in the 60% range, there is another class of people who simply will not.

Those considered “super-rich” — making $5 million or more per household — will do what this class of people has been seen doing in France, since its 75% income tax rate on individuals making more than 1 million euros per year ($1.13 million) was passed in 2014…

They’ll leave.

If You Hate The Rich Now, Just Wait Till They’re Not Around Anymore

That’s exactly what the super-rich of France have been doing in droves since liberal President Francois Hollande took office in 2012.

The end result? After riding into office on promises of a 75% tax rate, the reality of the method led to a 39% decline in tax revenue from the French super-rich between 2013 and 2014.

If it happened in France — a nation where income equality is far more to the liking of left-leaning rhetoricians — you can bet it would happen here on a far greater scale… especially after you throw in the expanded, closed-loophole estate tax revision also proposed by Senator Sanders.

And that’s only the first half of the equation…

America is also home to the most major corporations of any other nation, beating China out by 30% and Japan, the next in line, by 137%.

The U.S. also has the third-highest corporate tax rates of any nation in the world, exceeded only by the odd pairing of Chad and the United Arab Emirates.

However, the permissive corporate tax code, specifically the extremely popular Delaware system, makes the U.S. the most popular country for major corporations to thrive and evolve.

If and when these benefits close, the world’s richest entities will also do what they’ve always done: They’ll leave.

Reincorporating in other nations, even at the cost of exit taxation and other punitive measures by the government to discourage this sort of behavior, will still cost less than staying.

It’s a matter of simple math.

So the question now is: Where will this scenario take us in the years and decades that follow?

Well, considering that this sort of policy and social mindset tends to operate in a positive-feedback loop, the long-term prognosis is grim, to say the least.

Governments that take to institutionalized exploitation of class stratification have rarely achieved anything good in the long run.

Decline begets decline within this feedback loop, and the more decline there is, the more support there is for the system that creates and champions the erroneous policies to begin with.

A very close comparison would be the same sort of dynamic that causes cattle to stampede, illustrated in the diagram to the right.

It makes sense that masses of stressed-out humans should exhibit this herd mentality.

After all, even when economic times are dire, there are always rich people to blame. And the more you thin out their numbers with oppressive policies, the more those who remain are seen as the cause of the ongoing problems.

This feedback loop has turned deadly on more than one occasion, even in modern times.

It led the French to two revolutions, both bloodbaths. 

It led Russia into a seven-decade journey down the path of totalitarian communism, with tens of millions killed. 

It pushed Germany further into Hitler’s intoxicating embrace, and it continues to subjugate the Chinese and the North Koreans.

Ok, so I made the Hitler reference already, which is a classic sign of absurd exaggeration and thus a weak argument. But considering the mindset of Depression-era Germany when he rose to power, it’s not hard to see how a tired, downtrodden, beleaguered general populace can suddenly rise to embrace nationalist socialism right along with all of its benefits and prejudices.

It’s not like they knew they were putting a tyrant into power… It’s not like they could see the future.

They just wanted a man of the people to come and clean things up, tax a select class of people, and bring sustainability back to the middle class.

The real question should be: Can we tell the future as we witness the same sort of viral fanaticism emerging around this charismatic rhetorician?

The answer is no. We cannot.

We just know that his supporters already call him Bernie, like he’s a friend. A member of the family. Worthy of his own portrait on the wall, right next to the kids and grandkids.

A Wolf in Sheep’s Clothing

We also know that with the voter demographics of today, a Democratic president in 2016 is almost inevitable.

Whether it’s Senator Sanders or somebody else who takes the Oval Office, the fact that we’re moving away from the naturally competitive meritocratic system that built this empire into a cumbersome, overweight, demented version of its former self is unequivocal.

For most of us, fleeing the country for South America, Canada, Monaco, or a private island isn’t an option.

The next best option is to see it coming and to do something about it while there’s still time.

As this anti-capitalistic sentiment spreads across the Western World, the only answer for savvy investors now is to look at the emerging markets…

Places still on the upward leg of the growth curve, where the pitfalls of too much excess over too many years are still decades away.

The Future is Still Bright… If You Know Where to Look

Right now, there’s a company that’s doing something no other consumer technology company has been able to do before.

By compressing Internet bandwidth by an unprecedented factor of 30, it’s been able to create the cheapest wireless Internet service ever and even coupled it with the world’s cheapest tablet.

The bundled package isn’t something you’re going to see become popular here in the States, but in India, China, and a number of other emerging economies, this package will unlock the power of the Internet for hundreds of millions, perhaps even billions of first-time users.

This company is already based in Canada, so you don’t need to worry about upcoming federal campaigns against corporate excess. And its first target market is India, which is soon to overtake China as the fastest-growing major economy in the world.

The potential here is huge, but the company still isn’t.

But with tablets already in production and rolling off the assembly lines to awaiting customers at a rate of more than 20,000 per month, it’s only a matter of time before this company becomes a household brand to the biggest untapped user base in existence.

Companies like this are the future, even if our own future is uncertain.

Don’t waste another minute. Check out my brand new report, explaining who this company is and what it’s about to do.

Fortune favors the bold,

Alex Koyfman

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