Tuesday, December 14, 2010

A Frank Talk About Taxes

Let's be blunt about taxes, and the arguments about taxation in politics today.

The argument in favor of cutting taxes when we have a huge budget deficit may seem absurd, but there is a certain logic behind it. The general idea is that lower taxes result in greater economic growth and job creation, which in turn leads to more tax revenue coming into the government, not less. It's akin to the strategy of a store lowering prices in order to generate more revenue in sales. It may seem suicidal to lower prices at first, but the increased sales more than makes up for the loss afterward. In the case of government, lower taxes result in more growth, more jobs, and that translates to greater tax revenues in a healthier economy.

But there needs to be a delicate balance, here. After all, if a store cuts prices too low, it cannot make a profit off sales, no matter how great the sales volume, because the cost of goods and of overhead becomes greater than the amount made upon resale. The store must sell more than it buys for in order to survive. Thus, a store wants to keep prices low, but not too low, in order to maximize profit.

In like manner, a government wants to set its tax rate at an optimal level. It wants to keep tax rates for the working classes low, and high only upon those individuals who are so wealthy that they no longer contribute to job creation. But if it sets this rate too low, particularly on the very wealthiest, it runs the risk of not being able to sustain entitlements (that is, tax-spending that politicians can't cut).

It's an optimization problem: At what tax rate does a government maximize its own revenues?

Now, if by now, you're expecting me to argue that the upper 2% should get smacked down to pre-Bush II era levels, you would be wrong. Surprised? You shouldn't be. The upper 2% basically comprises people who make more than $250,000 per year. There are a large number of small and medium-sized businesses which are sole proprietorships making between $250,000 and $500,000 per year, and which employ anywhere between 30 and 1000 people at a crack, or more. Small firms, law practices, start-ups, top-notch surgeons and contracting companies live here. These are more or less in the lower-half of the upper 2%: the ones who make more than 98% of the people out there, but not more than those who make more than 99% of the people.

In that uppermost 1% lie an entirely different category of wealthy people. Very few small or medium business owners reside here, and if they do own a business, it's a mega-business. Maybe an executive boardmember of a multi-national, but more likely someone who makes the majority of his money via capital gains. In short, someone who, if given a tax cut, will pocket it rather than make new jobs. Here, you might find aquisition sharks, trust-fund babies, CEO's of credit card companies, and so forth. You also find people who are what I refer to as "special salaries," such as actors, major-league sports athletes, authors, certain artists, film and television producers/directors, and others who normally don't make shit, except for a very elite few who are lucky enough to be famous doing it.

Bottom line is this: If one keeps the taxes low on the lower half of the upper 2%, one does create economic growth. Republicans actually have a legitimate gripe, here! But guess how many jobs are created by cutting the taxes for the top 1% of income earners?

The answer is, damned near none!

A much more acceptable compromise for our Trophy President would have been to have agreed to making the Bush tax cuts permanent for 99% rather than 98% of all Americans, but holding the line on taxes for those rich enough to rest on their laurels and/or who create no jobs. I would very much have liked to see that. Unfortunately, we have a tax compromise that does not do this, but at least does not hammer the upper-tier of the small businessman. It's a tough compromise, but liberal activists who are urging me to contact my congressmen and senators to urge them to vote against this deal will get no response from me. The lesser of two evils is to let this compromise stand!

This will be a key issue in 2012, and if Obama wins, this compromise, for all the bitching liberals do about it, will be why. But I suggest the Dems change their focus. Instead of saying no to the richest 2%, how about saying no to the richest 1% instead? Maybe even the richest 0.5%?

Nah, that would make too much sense!

Eric

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