Tuesday, August 3, 2010

Tax cuts for the rich.

A common theme currently among media commentators is that most Americans likely won't face a tax increase even if top earners do (see here, for example).

The unspoken assumption behind many such analyses is that as long as my taxes aren't raised, I won't object to tax increases.

Leaving aside the divisive, classist mentality upon which such analysis is based, particularly against older Americans who have higher incomes, I think Americans generally understand that if taxes are raised on my boss, or on my company's wealthy customers, or on our investors, it will reduce our profits and investment capital, leading to fewer jobs and prosperity for all. Such measures may cost me my current job, or make it harder for me to get a raise or find a better job in future.

In short, this divide and conquer strategy is a political loser. Tax cut defenders shouldn't be afraid to defend lower tax rates, including for the rich.


  1. I have encountered a couple arguments in response that are not easy to parry.

    1. Individual income tax rates were higher during periods of prosperity

    2. If you want job creation, the government will make an exception and won't increase rates for investing in small business, investing long-term etc.

    The Republicans may be able to keep the baby by keeping all the bathwater on the Bush Tax Cuts, but they are fighting to go back a few years which even according to your gold chart (and my personal experience matches this) weren't so good.

  2. When tax rates were higher there were numerous loopholes. The exceptions in your point number 2 are examples.

    We are fighting numerous economic problems. Tax rates are just one of them. A key problem America has to face is that we have steadily decreased after-tax rate of return. We raise taxes, increase compliance cost of our labor regulations and environmental regulations, increase liability risks of possible lawsuits for environmental impact, product liability, etc. We increase the risk of long-term investment by constantly playing with the value of our currency. We mandate costs to business that weren't taken into account when investments were made. Our competitors are now fielding a better educated and better trained workforce than in the past.

    All of these factors add up to move capital from the US to our competitors or out of risky investments and into bonds or into gold. To argue that further decreasing the after-tax return on investment in the US won't affect the amount of investment ignores how business leaders make decisions. If the net profit is too low for the risk involved, no investment will be made.

  3. Tom has it just right, properly framing the issue in terms of incentives to produce. The idea of lowering taxes on wealthy taxpayers is typically defended by pointing out that the wealthy taxpayers are to a large degree the small business owners. The typical attack is that the wealthy taxpayers don't 'spend' their money but instead 'save' (aka, 'invest') thier money. In the latter case of attack the criticism is based on a false keynesian inspired delusion that spending on consumption has a lasting stimulative effect on aggregate demand. The whole idea of spending on consumption for stimulus is without a reasonable or empirical basis. It is in fact anti-stimulative when you borrow money for consumption. In the other case, in defense of reducing tax taking from the 'wealthy;' the wealthy are more likely to invest the money. Distinct from spending, investment does create wealth and growth becuase it maintains or creates new assets that provided future cash flows. So, the policy goal should be to encourage investment not spending. A more focused way to create incentives to invest would be to lower corporate tax rates and rais dividend rates to regular income, with regulations that require payment of dividends with retained profits that are not reinvested. The most focused way to get the wealthy business owners to reinvest is to reform the way that sub-s corps are taxed. Now, the owners are taxed on 100% or the earnings of sub-s corps whether or not the profits are distributed or reinvested. This rule acts as a penalty for owners who reinvest profits to expand or maintain sub-s corps. 65% or all U.S. corps are sub-s and this is where all the job formation occurs...and we penalize reinvestment through this corporate form! All we have to do is allow a deduction for reinvestment of profits by sub-s owners.

    It is unfortunate that the political formaulations and understanding of the encomics of production cause a conflating of tax cutting schemes that are for the most part aggregate demand inspired and typically hostile or neutral to creating production incentives.