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Tuesday, November 30, 2010

Taxes Don't Matter (And Bill Gates can Fly)

Anybody else imagining John Crichton from Farscape shouting out "Taxes don't matter!" in that same voice he used in the episode where he was saying that about crackers? ...No? Just me? Crap. Moving on.


I almost fainted when I read this one particular article in BusinessWeek today. Not because of what the writer said--he was just reporting. No, it's because I actually agreed with a politician. (...Mostly.) Wait, what?


Apparently, the Senate minority leader said that "[n]owhere will you find a study or survey which indicates that raising taxes on small businesses with over $1 million in income will create jobs or help spur the economy." I have no idea how a survey could indicate something like that even if it were true, and you should always use "that" instead of "which" to introduce a restrictive relative clause, but other than that--holy crap, I agree with a politician. Did someone in Washington say something reasonable, or am I just infected with something?


Well, I haven't kicked any puppies today, so I'm going to just assume it's not that the centrifugal force sucked out my soul on that kiddy ride the other day.


Democrats and Republicans are duking it out over more than one thing these days, but with the Bush tax cuts set to expire pretty soon, taxes are one of the big issues they're drawing blood over (okay, the article says they're trying to reach a "bipartisan agreement," but we all know that political "agreement" really involves an impromptu boxing match... or a shank). Apparently, President Obama opposes making permanent the tax cuts for those earning more than $200,000 individually or $250,000 as a couple, and other politicians have suggested that maybe we could compromise and only increase taxes on taxpayers (including businesses) earning over $1 million. This is essentially implying that the rules of how taxes affect people and businesses doesn't apply to the "rich." Which makes sense, right? Just like how the law of gravity only affects Bill Gates when he wants it to.


Wait, that's not right? Bill Gates isn't richer than God and can't turn off gravity? ...Have I been deceived all these years?


Fine, well, if Bill Gates can't fly, then rich people and wealthy businesses paying higher taxes doesn't magically have no effect on the economy. So let's look at individuals first--leave the businesses for later. Obviously, $200,000 or $250,000 is filthy stinking rich and therefore should be punished for daring to not be poor and miserable, or at least average inundated-in-debt middle class (this is what I have gathered from listening to politicians). But there's an issue here. Taxation causes inefficiency, and the more you tax, the worse it gets. "Nonsense," the politician exclaims! "Why, how could it possibly do that? Taxes fund government, and government is the most efficiently efficient thing that every functioned efficiently!"


...Let's ignore that last sentence and the brain trauma it points to for now. Yes it does, and there are reasons. Now, assuming efficiency in the markets for most goods,--which, without government involvement or a source of market failure like externalities, one should assume,--scarce resources are allocated efficiently, so we don't have too few child car seats and too many nuclear-powered cat-massaging car seats (you know you missed it). Markets are pretty good at that. But throwing taxes into the mix messes this up--because taxes reallocate resources. Yeah, taxes don't reallocate resources the same way that, say, a government mandate that every car must come equipped with a built-in nuclear-powered cat-massaging car seat would, but they mess with consumer sovereignty something awful. Normally, the consumers determine the allocation of resources based on how much they're willing to pay for how many of whatever the good in question is. The producers don't determine it--they have to adjust to it. They can make ten million fuzzy pink pens, but if people are only weird enough to buy a million of them, well, those resources aren't going to keep going to those extra nine million fuzzy pink pens--and that company will be very much out of business (and inundated in pink fluff). It's the people buying the pens who determine how many will end up being made, and thus, how much of the resource pie gets allotted to that industry. But when the government taxes income, the consumer doesn't have as much money to consume with. That means his ability to determine where those resources go is reduced--and it doesn't matter which consumer's ability is reduced, it still mucks up the allocation. You then get government choices substituted for consumer choices, because now the government has money to bid resources away from what the people want to what the government thinks they should want. And ta-da, suddenly you really do have millions of units of nuclear-powered cat-massaging car seats being made, fuzzy pink pen demand be damned.


Taxing businesses more may be even worse. For one thing, that $1 million figure isn't profit--it's gross. Never mind that businesses grossing that much money still have, oh, what do you call them, expenses? Including workers' paychecks? Yeah. Nothing bad could possibly come from taxing away the money they were using to pay their employees with, not in a country where we're constantly fussing over the unemployment rate. On top of that, it's not just little start-ups that take entrepreneurial risks--big businesses do, too. The higher the taxes, the less potential pay-off the business sees. The less potential pay-off the business sees, the less likely it is to undertake the risk. When businesses don't undertake the risk to expand or try new things, they don't need more labor, and when nobody needs more labor, nobody bids up wages. Big bad business isn't the only one taking a hit when its taxes are increased. It trickles down to workers and consumers, and it's not due to spite, either, so stop imagining that big companies have the eye of Sauron perched atop their corporate headquarters.


Ideally, we wouldn't have any income taxes--and as soon as I say that, the eye of Sauron perched atop the Capitol Building turns to me with its evil, burning gaze. So before I skip town, one last thought: it doesn't matter who or which company is having taxes hiked, it messes up the same economy. Or, and this could be the case, Bill Gates really can fly like Superman and the economy is only affected by taxes on the poor or middle-class and I don't have to change my whole worldview now holy crap please please be true.


Now where did I leave my fuzzy pink pen?




Sources:

"Obama, Hill leaders to meet: taxes, treaty on tap" by Jim Kuhnhenn. http://www.businessweek.com/ap/financialnews/D9JQIDGG2.htm


Comments:
The government only taxes income, after business expenses deducted, over the 200,000 in the top tax rate. This means the gross income minus all business expenses, including labor. If the government allowed the Bush tax cuts to expire for the top tax bracket, only 2% of tax payers who reported incomes from a business would see an increase in their taxes. This means only 2% of "small" business owners net over 200,000 a year. Reducing the tax rate for income earners below 200,000 would lower the taxes for the other 98%. Furthermore, 32.5% of those in the top tax bracket earn at least 50% of their total income from a business type source. So the other 67.5% earn the majority of their income in another way. None of which creates the need for employees directly. The thought process that leads one to believe a small business would apply a government stimulus, oops, I mean a reduction in taxes, to invest in his/her company by hiring more workers, would only lead one to believe those who make the majority of their income from, say, capital gains to invest in their portfolio. This too does not directly create jobs. Lastly 75% of the top income earners report income from s-corps. These income earners can be one of many, but less than 100, shareholders or the sole benefactor. Those who make their income from s-corps, forgo corporate or business taxes and penalties for breaking tax code. If there are five shareholders and their business nets $999,999, that income, if it were their only source of income, would not be taxed in the top tax bracket, but the next lowest. The extreme example would be a s-corp with 100 shareholders; their business would have to NET over $20,000,000 to for each individual's share to be taxed with the highest tax rate. $20,000,000 in profits is impressive, but you would have a hard time convincing anyone it is a small business. Once again lowering taxes for the tax bracket below the top tier would be more appropriate if real small business owners were your concern.
 
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