Ok, so I have been continually confused by the ramblings on the Republican side of the aisle about how increasing the top tax brackets will "stifle job growth". This is patently absurd, though it unfortunately sounds good on the surface. If you want to look at the actual data this little blog post wraps it together very nicely.
Ok, so I posted another blog post that shows the data, what more could I possibly have to say. Well here's the thing, the blog post I put up shows correlation. It assumes causation, but it doesn't go the extra mile of explaining why taxing the every living crap out of the "job creators" would create GDP growth, which in general creates jobs. To me it makes perfect sense that higher tax rates would increase job growth and reinvestment by business and that's what I want to talk about.
So first I need to let you in on a secret. It's a well kept secret, and it has been kept in the way that all great secrets are kept, out in the open. Here it comes . . . you only pay taxes on profits.
Well there's the secret. Somehow it's been left out of the conversation. The other half of the secret is that you don't pay taxes on the money you pay to your workers because that's an expense. Now it is important to point out here that "the money you pay your workers" includes some "tax" expenses. Payroll tax and whatnot, but that's honestly treated as part of the calculated "salary" expense. So for our purposes I'm going to treat that as part of the salary. I will not treat it the same way income tax is treated, as so many politicians have been doing recently.
So now a bit on "owning a company" and other forms of wealth. Most of Americans think of wealth in 1 term, money, which at it's core money is wealth, but it's only 1 form of it. The other primary form of wealth is "ownership". This can be ownership of a company, a house, a car, you name it. The two major forms of wealth we tend to measure in our society aside from money are property, such as a house or an apartment building, and company holdings. In fact these two forms of wealth are were the very rich have most of their resources. It doesn't make sense to keep your resources as cash, because then over time as inflation continues it's inevitable climb your money becomes less and less valuable. However, a company continues to gain in value because the goods and services that they sell are worth more and more money over time, due to the same inflation that makes your stationary money less and less valuable. Property similarly becomes more valuable over time and inflation continues to rise and houses, office buildings, and condominiums sell for more and more money.
One more quick piece of background. Profit equals income minus expenses. That's what's taxed. If you bring in 2 billion in revenue, and spend 1 billion just keeping the doors open and the lights on you don't pay taxes on 2 billion. You only pay taxes on the 1 billion that's left.
So I've laid all this groundwork, what does any of it have to do with high taxes creating job growth? Here's the thing. Wealth is not taxed. Wealth is very difficult to measure, money is very easy to measure. We only tax profits. So say you own a business, and it's doing very well. Let's say based on your projections you're going to bring in 1 million dollars in profits by the end of the year. Now let's say the tax rate is very low on all tax brackets. 0% for the first 8 grand, 10% up to 100 grand, and 25% on everything you make over 250 grand. So you have two choices, you can take the money home as profit, or you can spend that money to grow your business. If you grow your business then you'll be spending it out as expenses. It will no longer be counted as profits. This is the easiest way to avoid paying taxes, just spend out all your money growing your business. Sounds great, your business gets bigger, your wealth still increases, but you don't pay any taxes on that wealth. You can sell your incredibly huge business when you're ready to retire, and live like a fat cat. The thing is, growing your business is risky. What if a market you decide to get into collapses, or you are just never able to provide services as reliable as your competitors? If you just grow for the sake of growth, and don't look carefully at the market's your trying to expand in it can all result in a ton of wasted wealth. So you are obviously going home that first 250,000 bucks as profit. However, the risks associated with growing your business are likely high enough that in most cases it's probably a better bet take the remainder of the money as profit as well and call it a fiscal year. There might be a few incredibly safe bets you'll be willing to take in the realm of expanding your business, but not many.
Now imagine the same scenario where the top tax bracket is 40-50%. That changes things considerably. If you take your income above $250,000 as profit then you will pay quite a bit of it to the federal government. However, when you look at your business opportunities they don't have to pay off nearly as well to be a better bet than taking the profit home. A business person in this scenario is much more inclined to reinvest in the business, or take business lunches, and business trips, and any other thing that can write off as an expense. Setting hiring aside for a moment, even the extravagance of business spending in a high tax environment serves a stimulative purpose. Individuals who are very wealthy tend to spend a much smaller portion of their income than the very poor, because once all your needs are taken care, everything else is discretionary. However, if it's take the business dinner as an expense, or pay taxes on that money as income most people will take the business dinner. That means more money going into the economy that otherwise may have been reserved our of "prudence".
Now lets picking hiring up from where we set it aside. Unlike the extra business dinners and travel this is a direct investment situation. If you look at your high tax rate and decide that it makes more sense to open a new store in a new market complete with additional administrative staff, and retail staff, and construction contractors to set the store up instead of walking home with profits then you have additional jobs, and a directly stimulative effect on the economy. "Job Creators" are far more likely to take these steps if the alternative is to take home a payout that has been cut severely by taxes. This isn't brain surgery, but it does require a little bit of additional thought to see.
Increasing taxes on poor people directly slows down the economy because the poor spend everything they have anyway just to survive. Raising taxes on the rich speeds up the economy because they want to convert that money to non currency forms of wealth to avoid paying taxes on their income. Where the line changes is messy and complicated, and I don't pretend to know exactly where we would want to ask for more cash. I personally would like to see our highest tax bracket increase, and I'd like to see an additional tax bracket added for people who make well in excess of a million a year. How these changes would effect the spending patterns of the middle class is far less certain to me, as much of how they approach their individual monetary policy varies by individual, and I would love to see the politicians really hash out where this phenomenon starts and stops. First they would have to admit it even exists.
