A lot has been written lately about the effect of taxes on incentives to work. Most of the articles focus on the incentive of entrepreneurs to take on extra "work" to make more money. Essentially does the incremental effort make the incremental income worth it. I tend to agree with this logic, especially at very high marginal tax rates (like 60-70%). However, I do not think 36% to 39% makes much difference.
This by no means implies I am for a slightly higher tax rate, especially for entrepreneurs and small business. Even small changes in tax rates can make the difference in a project having a positive net present value and not. Expansion projects and new business can only be built if there is profit involved (unless you happen to be financed with a huge trust fund). So what does this mean?
When business people make the decision to build, expand, etc. they look at the after tax return on investment. So the take the gross margin a business is expected to return and multiply that figure by (1 - tax rate). So the closer the tax rate comes to 1 (or 100%), the less likely a business will chose to make a said investment because it will be more difficult to generate a sufficient return for the risk involved. Obvisouly high gross margin project will still be done because (1- tax rate) even for high tax rate situations can still be done. However, if an expansion plan is marginal to begin with, a 3-5% change in the tax rate could very well make the project economically unfeasible.
So who decides if the plan is unfeasible? Most likely the bank that is financing this new operation. The bank will look at the after-tax return and decide if they are willing to take the risk and loan the entrepreneur the cash to fund the venture. Lower taxes mean a higher return and less risk for the bank.
Given the above, this is really why I am for lower taxes, especially lower corporate income taxes. I can only imagine the projects that would be done in this country if the corporate tax rate was zero. The negative NPV projects at 36% tax rates might be feasible at a tax rate of zero. This means more capital investment and ultimately more economic growth. More capital investment also means more jobs and income that is taxable. Increased capital investment usually means more productivity growth that translates into income growth. Growth in income means more tax revenues for Uncle Sam.
I also believe as companies expand they will grow their dividends as a result of this new investment. These dividends will also be increasing source of tax revenues. Small percentages in taxes matter. They make the difference in a project green light or dusty book shelf. Projects that never get done have never created jobs. We need more projects....
Wednesday, October 20, 2010
Sunday, October 10, 2010
If want higher taxes...pay them.
Articles like this absolutely drive me insane. If you are "rich" and want to pay more taxes, you can voluntarily send a gift to the US Government any time you like. You can do it here:
Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782
The are willing to take unconditional gifts by check or money order.
I would love to know how many of these folks will actually follow through and give their extra little bit to the government? My guess is very few.
Personally, I would rather wealthly people keep their money. Most wealthy folks got that way because they provided goods or serives that others valued. This in turn created jobs and economic activity that benefited society. Giving more money to the Government will only go to make the leviathan even bigger. But it will allow the for spending millions on horse bridges, toad crossings, and social programs that have done nothing to alleviate poverty since the Johnson administration.
But if you are wealthy and just to throw your money in the money pit, feel free to use the address above. As for me, I think I can spend it better than Uncle Sam.
Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782
The are willing to take unconditional gifts by check or money order.
I would love to know how many of these folks will actually follow through and give their extra little bit to the government? My guess is very few.
Personally, I would rather wealthly people keep their money. Most wealthy folks got that way because they provided goods or serives that others valued. This in turn created jobs and economic activity that benefited society. Giving more money to the Government will only go to make the leviathan even bigger. But it will allow the for spending millions on horse bridges, toad crossings, and social programs that have done nothing to alleviate poverty since the Johnson administration.
But if you are wealthy and just to throw your money in the money pit, feel free to use the address above. As for me, I think I can spend it better than Uncle Sam.
Chinese Currency
There has been a lot written recently about the Chinese manipulation of its currency. It should be the Chinese that are mad about a weak currency, not Americans. Here's why:
1. A cheap yuan and expensive dollar makes consumer goods made in China cheaper for all of us. That is a great thing. That means more income available to buy more cars (maybe even ones made in this country), more life saving drugs, and attend more leisure activities like movies.
2. The only way the Chinese can keep their currency cheap is to flood the market with yuan and buy dollars. This makes goods for Chinese consumers very expensive. That's why is hard for Chinese to buy US-made products and it is an impediment for them to increase their standard of living.
3. If the Chinese have a strong relative currency, it means they can go out and buy even more resources. They are aggressive today, can you imagine what they would be buying if they had the world's strongest currency? That has been a luxury that we have enjoyed in the US for decades and the main reason energy is so cheap in this country.
So let the Chinese do whatever they like with their currency. I hope they keep it weak so all my "Made In China" crap remains cheap.
1. A cheap yuan and expensive dollar makes consumer goods made in China cheaper for all of us. That is a great thing. That means more income available to buy more cars (maybe even ones made in this country), more life saving drugs, and attend more leisure activities like movies.
2. The only way the Chinese can keep their currency cheap is to flood the market with yuan and buy dollars. This makes goods for Chinese consumers very expensive. That's why is hard for Chinese to buy US-made products and it is an impediment for them to increase their standard of living.
3. If the Chinese have a strong relative currency, it means they can go out and buy even more resources. They are aggressive today, can you imagine what they would be buying if they had the world's strongest currency? That has been a luxury that we have enjoyed in the US for decades and the main reason energy is so cheap in this country.
So let the Chinese do whatever they like with their currency. I hope they keep it weak so all my "Made In China" crap remains cheap.
Less Govt, more Capitalism
Forbes has published a great article recently written by Brian S. Wesbury and Robert Stein. In this article, they make the case that our recent problems are not the result of capitalism run a muck, but rather the crowding out of the private sector by a government that is growing ever larger. I could not agree more.
I really like the point they make that the world's standard of living began to accelerate about the time when the US Constitution was established. This amazing achievement set forth a limited set of rules that unleashed the potential of free men.
So how far have we regressed? The Constitution is essentially just a few pages legislation. In these few pages, there is everything present to run a Federal Government. Now we have a bill that is in excess of 2000 pages, and all it deals with is Health Care. Do you think that might have something to do with fact that entrepreneurs have trouble navigating today?
Going back to the Forbes article, the comments amaze me. There are so many people out there that think bigger government will save the day. They give government the credit for a better life. One poster said most of the life expectancy gains come from better sewers, paid for by government. But you have to ask, where did government get the means to build those sewers? It came from a free society that produced wealth, that could in turn be taxed.
I don't dismiss that government can't provide necessary and valuable service to society. But I am confident that is does not need to spend $3 Trillion to provide that service. Government has to create the environment that inspires wealth creation. That's providing safety through a sufficiently strong military, establishing rule of law with a fair and just legal system, protecting private property rights with unwavering commitment, and keeping the confiscation of wealth low by keeping taxes low regardless of any person's accumulation, and protecting the free speech of all.
Government should be easy. Our elected officials have made it unreasonably complicated by imposing their will on the citizens of this country. Capitalism and small government have contributed more to the rising standard of living than any other force in the last 2000 years. Yet so many people want to sack capitalism and grow government? I doesn't make sense.
I really like the point they make that the world's standard of living began to accelerate about the time when the US Constitution was established. This amazing achievement set forth a limited set of rules that unleashed the potential of free men.
So how far have we regressed? The Constitution is essentially just a few pages legislation. In these few pages, there is everything present to run a Federal Government. Now we have a bill that is in excess of 2000 pages, and all it deals with is Health Care. Do you think that might have something to do with fact that entrepreneurs have trouble navigating today?
Going back to the Forbes article, the comments amaze me. There are so many people out there that think bigger government will save the day. They give government the credit for a better life. One poster said most of the life expectancy gains come from better sewers, paid for by government. But you have to ask, where did government get the means to build those sewers? It came from a free society that produced wealth, that could in turn be taxed.
I don't dismiss that government can't provide necessary and valuable service to society. But I am confident that is does not need to spend $3 Trillion to provide that service. Government has to create the environment that inspires wealth creation. That's providing safety through a sufficiently strong military, establishing rule of law with a fair and just legal system, protecting private property rights with unwavering commitment, and keeping the confiscation of wealth low by keeping taxes low regardless of any person's accumulation, and protecting the free speech of all.
Government should be easy. Our elected officials have made it unreasonably complicated by imposing their will on the citizens of this country. Capitalism and small government have contributed more to the rising standard of living than any other force in the last 2000 years. Yet so many people want to sack capitalism and grow government? I doesn't make sense.
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