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Hillary Clinton Wants to Tax the Rich -- Here, There and Everywhere

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Hillary Clinton"Don't tax you. Don't tax me. Tax that fellow behind the tree."

You've got to hand it to former Louisiana Senator Russell Long. When he coined that saying, decades ago, he nailed the guiding principle of politicians in government -- everywhere and everywhen. You want revenues? Fine and dandy. But if you also want to get reelected, make sure you get those revenues from somebody else.

In our current democracy, the "somebody else" most often targeted for taxation these days is "the wealthiest 1%," a group of folks with the equally attractive attributes of (a) having a lot of money to tax and (b) lacking a majority vote with which to punish the taxer.

But taxing high income individuals does pose problems -- problems that Secretary of State Hillary Clinton proposes to deal with.

Don't mess with taxes

Perhaps the chief problem with taxing the wealthy is this: Rich folks are awfully good at dodging the tax man. They've got accountants and lawyers at their beck and call who are experts in locating loopholes in the tax code.

And when such "tax minimization strategies" fail?

Why, then a rich guy can always decide to "pull a Facebook" -- follow in the footsteps of Facebook (FB) co-founder Eduardo Saverin, renounce U.S. citizenship, and fly away to someplace with a more lenient tax code. (It's not just U.S. citizens going this route, either. Last month, Bernard Arnault, France's richest man and the CEO of luxury-goods maker LVMH, responded to French plans to hike taxes on the rich by emigrating and seeking Belgian citizenship.)

Enter Secretary Clinton, with a novel solution to the problem: Tax everyone, everywhere, and especially the rich.

Make Them Pay

Clinton first floated her proposal at the Clinton Global Initiative conclave in New York last month: "It is a fact that the elites in every country are making money. There are rich people everywhere, and yet they do not contribute to the growth of their own countries."

So far, mainstream commentary on the speech has painted it as a simple expression of the American-centric worldview: We think raising taxes on our richest 1% is a pretty keen idea, and you other countries should, too.

But there may be something more subtle afoot. The real purpose behind Clinton's salvo could be to send a shot across the bow of would-be Saverin and Arnault imitators: If you think you can avoid higher taxes by simply switching citizenship, think again.

Nowhere to Run to

Consider: Right now, the top 1% of American taxpayers earn annual income of $1.9 trillion. Collectively, that is. On average, the effective tax rate on this income is about 29%. Thus, if you're a politician looking for an easy way to close America's $1.3 trillion budget gap, raising taxes on 1% of Americans looks like a made-to-order solution.

It just so happens that after taking 29% of these folks' income in the form of taxes, the 71% they have left over works out to a little over $1.3 trillion.

Voila! Problem solved! Except for one thing: You obviously can't raise taxes on the 1% to 100% -- or anything close enough to make a real dent in the deficit -- without causing a lot of people to seriously reconsider the benefits of U.S. citizenship.

Raise taxes on the richest 1% too much, and you're likely to spook a few of them into bolting -- though probably not enough of them to affect your ability to reduce the budget deficit, granted. But it still makes you look bad when the fauna start fleeing the forest.

So to prevent this from happening, it's probably prudent to start closing off a few exit lanes, and making escape more difficult before the Great Tax Hunt begins.

And that's how we wound up with the CGI pronouncement last month. Secretary Clinton apparently wants to make it harder to find a tree safe for tax-evaders to hide behind, anywhere in the world. And while that may not solve anyone's deficit problems, it sure makes for good politics.

Rich Smith is a Motley Fool contributing writer. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook.

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