The bitter and partisan debate on extending the Bush tax rates was another manifestation of the debate on the inequality in the distribution of income and wealth in our country.  There are those who contend that our inequality is making us like a banana republic, where the very wealthy control and suppress the rest of the population.

Clarity suffers when rage rules.  Exactly who are the wealthy and how are these people affected by proposals to correct this social injustice? Is our wealth distribution as unequal as is often claimed? If so, why is it and is there some larger social benefit to this skewed distribution?

During his campaign the President drew a line at $250,000 in income. Those below that arbitrary level would not have their taxes raised from the last Bush rate, although in Orwellian political speak this is call a tax cut; while those above that level would see the current rates expire, creating a tax increase.  At $249,950 in income, you are not rich, but at $251,000 you are. If all we were considering was a tax increase of a few percentage points on incomes in excess of $250,000, I doubt the reaction would be as strong.

But the discussion is clouded by class warfare rhetoric.  Robert Reich commented on Bill Maher’s show that there were dozens who earned over a billion dollars running Wall Street hedge funds and it was absurd to allow these people a tax cut given the dangerous deficits we face, therefore we should raise the rates on the richest 2%.  There is a big difference between one earning $251,000 and one earning over a billion. To use this as a rationale is a fallacy of using an extreme example to describe a much more common occurrence.

$251,000 in income could be the paycheck of a corporate executive, a lawyer or a doctor or it could be the reported earnings of small business owner. In fact about half of the small business owners would fit in this range.  But the small business owner may be paying himself a salary of only $100,000 and the other $151,000 may be sub S earning on which he must pay taxes even though these earning may not be available in cash.  If a business is growing the profit is likely invested in inventory, accounts receivable, or new capital equipment like delivery trucks, computers, and processing equipment. Anybody with real experience in the world of small business, which excludes just about everybody in this current administration, understands this.

Particularly at a time when credit to small businesses is very difficult to obtain, a tax increase may leave a small business owner with no other source to generate the additional cash but to shrink her inventory or tighten their credit on their customers, or forestall the addition of additional capital equipment. You can begin to imagine how this predicament for hundreds of thousands of businesses can negatively impact our economy, and cause tax revenues to actually decline as a result.

But the threat of a tax increase is less threatening than the uncertainty from thousands of pages of radical new legislation that will generate tens of thousands of pages of new regulations, much of it from agencies that have not been created, and written by people who have not yet been hired.  But every business person knows that the result of this will certainly not be to lower costs, and they have no idea how much it will increase costs.

Those business people who are fortunate enough to actually have cash are sitting on it; not out of greed but out of uncertainty.  If you inherited $10,000 from a deceased relative would you buy a CD from a bank who could not only not tell you what rate of interest you would get, but could not even assure you that you could not lose money?  Neither would most business people.

The tax increase is one of many factors currently restraining economic growth. It is a bit of trap to believe that in light of all the other many burdens that this alone will have much of a stimulating affect; just as it has been proven that another billion dollars in deficit spending will not create a  stimulus effect of any duration.  But any tax increase during a period of a very weak economy and very tight credit will likely have a chilling effect;  especially if it is aimed at the so called “rich”.

It is the progressiveness of our income tax that has made our economy so fragile. With the top 5% paying well over half of the tax revenues the government has become dependent on them for the rapidly growing costs of new and old social programs.  Class warfare legislation, regulation, and rhetoric endangers the very programs they seek to support.

Much of the class warfare rhetoric is stereotypically juvenile, and as intellectually dishonest as racist propaganda. It is not only morally repugnant it is so pragmatically flawed that it will likely achieve the opposite result of what they seek.  But do not expect them to accept any responsibility for their actions.