Games Politicians Play

From Cato

High Taxes=Less Economic Growth

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....

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.

Taxes

TAX STAT - The top 1% of US taxpayers is responsible for the payment of 40% of all federal income tax. Ten years ago (1998), the top 1% of taxpayers paid 35% of all federal income tax. Twenty years ago (1988), the top 1% of taxpayers paid 28% of all federal income tax.

(source: Tax Foundation, IRS).


B Hussein could continue this growth. I guess I need to stay out of the top 1%.

Why McCain's Corporate Tax Break Makes Sense

From part of an article on Mises.org.:

Corporate taxes reduce the profits of business owners. This is true because net income is reduced by the tax rate. For example, Firm X, with a $100 investment, earning a 7% return has an income — before taxes — of $7. With a 10% corporate tax rate, net income — after taxes — is $6.30. Firm X now has earned a 6.3% return. In contrast, a corporate tax rate of 40% reduces net income after taxes by $2.80 to $4.20, or a 4.2% after-tax return. This rise in taxes, on the margin, reduces the profit-seeking incentive to take business risks. Why risk starting a biotech company when inflation-protected T-bill's will give you the same return? Entrepreneurs and venture capitalists less willing to take risk means less innovation and fewer innovative ideas being economically viable. This results in less economic growth. Conversely, higher returns on invested capital encourage investment and savings. All of this leads to more capital savings, more innovation, better technology, and higher wages.

Further, the above example of Firm X is true if the firm does not have the pricing ability to transfer the tax to its customers. If the ability does exist, an increase in the corporate tax rate is really a tax on customers of the firm. In this case, consumers now have less to spend and save and the end result is the same.

Finally, a firm unable to pass on a tax increase or bear the reduced profit will either attempt to cut costs by reducing wages (among other costs) or be forced to go out of business.
The main point is this: by definition, corporations do not pay taxes — people pay taxes. A corporate tax is either a tax on shareholders of the firm, customers of the firm, or employees of the firm. Less corporate tax means more innovation, capital savings, and spending by these groups — also known as economic growth.

Just How Much Does The Government Spend?

The "reform" oriented Congress the Democrats promised is failing to deliver on their promises. The Heritage Foundation has published a report detailing just how poorly the Democrats have lived up to the reforms they promised. Here are some highlights:

Federal spending now tops $25,000 per household annually, and the coming Social Security, Medicare, and Medicaid costs of 77 million retiring baby boomers threaten to add another $12,000 per household to the taxpayers' annual tab.

The Democratic congressional majority promised pay-as-you-go (PAYGO) budgeting that would prevent new deficit spending. During the 17 months of their majority, they have used blatant accounting gimmicks, such as fake sunsets and shifting payment dates, to:

• Pass SCHIP (State Children's Health Insurance) legislation adding $55 billion to the budget deficit;
• Enact a student loan bill with $15 billion in new deficit spending; and
• Waive their own PAYGO rules and enact a farm bill that adds approximately $20 billion to the budget deficit, despite record-high farm incomes.

In failing to offer spending reductions, congressional budget writers ignored:

• At least $55 billion in annual program over payments;
• $60 billion for corporate welfare;
• $123 billion for programs for which government auditors can find no evidence of success;
• $140 billion in potential budget savings identified in the CBO's "Budget Options" books; and
• Massive program duplication, such as the 342 economic development programs, the 130 programs serving the disabled, the 130 programs serving at-risk youth, and the 90 early childhood development programs.

Congress's budget resolution pledges to raise taxes by an average of $3,135 per household. This classic tax-and-spend budget pushes up discretionary spending and leaves the nation woefully unprepared to face the coming retirement of 77 million baby boomers.

The Free Market For Taxes

I really like this blog post from Greg Mankiw:

Summers on Tax Competition

Larry is against it:

the US should take the lead in promoting global co-operation in the
international tax arena. There has been a race to the bottom in the taxation of
corporate income as nations lower their rates to entice business to issue more
debt and invest in their jurisdictions. Closely related is the problem of tax
havens that seek to lure wealthy citizens with promises that they can avoid
paying taxes altogether on large parts of their fortunes. It might be inevitable
that globalisation leads to some increases in inequality; it is not necessary
that it also compromise the possibility of progressive taxation.

This issue goes well beyond economics to questions of political economy and political philosophy. If you think it is the job of government to take from Peter to pay Paul, and if Peter can move around the globe, then you need international tax cooperation. Otherwise, some countries will become nations of Peters, leaving all the Pauls to fend for themselves.

On the other hand, if you think that the main job of government is to facilitate voluntary exchange by protecting property rights, rather than re-slicing the economic pie as it sees fit, then tax competition is a good check against excessive interventionism. In other words, are you more worried about too little government or too much?

All Sides Will Have to Give and Take

Here is a great blog entry from Arnold Kling. Unfortunately it looks like Republicans will have to tax more, Democrats spend less, and Boomers get fewer retirement benefits. Otherwise, the US Government will be bankrupt. The comparison between the 2000 Budget and the 2009 Budget blows the mind.

Fiscal Reality

Laffer and Taxation

Here is a great video series from Cato on the Laffer Curve. It is a good explanation of the effect of tax rates on tax revenues. Below is part III, but all three are worth the time to watch.

How are your tax dollars spent?

Check out where your taxes go. I support over $13,000 in military spending every year. With that kind of money you would think they would throw in an m-16 or an occassional tank drive around the base. At least let me use the firing range or shoot off some mortars.

http://www.nationalpriorities.org/taxchart2008/

The Rich and Taxes

Another good article today in Real Clear Markets. I always wondered why pandering politicians keep their jobs. Here is the answer:

Last week, for instance, a labor union-supported policy group released a study
noting that Connecticut now has the largest gap between the rich and the poor in
the nation. The local pages of the New York Times dutifully reported on this
study and asked, what could be done as a remedy? Raise taxes, the advocates
urged, heedless of the fact that in Connecticut the top 5 percent of the state’s
taxpayers already bear the bulk of the state’s income tax burden. The situation
is much the same in neighboring New Jersey and in New York where, for instance,
the top income bracket represents just 0.4 percent of taxpayers, but they pay
one-third of the state’s income tax.
Is there a consequence to this? Well, for one thing, it’s practically compulsory when talking about the state government in each of these three places to use the adjective “dysfunctional.”
All three states have seen governors resign in disgrace within the past several
years. All three states are rife with corruption, pork barrel spending and
government inefficiencies. Hardly a day goes by that the newspapers don’t reveal
yet another outrage of waste, or mismanagement or thievery.
Yet little changes in the government of these states, much to the amazement of outsiders,who often wonder why voters continue to stand for it. The answer, I tell them, is that a very small percentage of voters are paying for this waste,
mismanagement and bloat. The rest pay so little that they don’t really care, or
they benefit from bloated government, either through jobs in the oversized
public sectors, or as users of services.
This is what you get when the few
support the many--the direction the federal government is now heading. You get
Connecticut, New York or (God help us) New Jersey.

When few support the many or costs are spread out and benefits concentrated, there can be nothing but problems yet no incentive to change.

Tax Cuts for the "Rich"

Did Dubya cut taxes for the rich? Absolutely yes because they are the ones that actually pay taxes. The top 10% of AGI taxpayers actually pay over 70% of the Federal Income Tax. That is anyone with AGI above $103,000 in 2005. I bet B Hussein and Billary fail to mention that when they talk about tax cuts for the rich. On top of that, 37% of "tax payers" pay no taxes as they are in the 0% tax bracket. Who did that? Dubya. How can you reduce taxes on tax payers that pay no taxes? Give them rebates for taxes they did not pay.

There is a great post today at Carpe Diem.

Corporations Don't Pay Taxes, Consumers Do.

There is some discussion going on in the media about corporate taxes and who pays what. It turns out that ExxonMobil pays as much in US Corporate Income Tax as the bottom 60% of individual taxpayers. But is it really the corporation that pays? No, it is the consumer.

Corporations spend money and make capital outlays for new equipment based on Net Income After Tax. The higher the tax rate, they more they have to charge to earn a return on their invested money. The higher prices corporations charge make it harder to generate the revenues they need to be profitable. After all, each of us buy fewer goods when the price is high. On the other hand, lower tax rates mean it is easier for corporations to generate the revenues necessary to be profitable because their prices are (can be) lower.

American today has some of the highest corporate tax rates in the world. In fact, according to a recent study by PriceWaterhouseCoopers the US now ranks 102nd out of 176 countries. This means it is easier (as far as taxes are concerned) for corporations to earn returns on investment in 101 other countries besides the US. So is it any wonder that corporations are moving operations overseas? The US is becoming evermore uncompetitive because of government policy, not cheap labor or other cost concerns.

In addition, consumers are the ones that pay taxes corporations pay. We consumers pay those taxes in the form of higher prices for goods and services. At a time when other countries are lowering corporate tax rates, we have Congressmen and Presidential candidates hollering for higher taxes on our corporations. This means we will become more uncompetitive in a global economy and we will experience higher prices for the items all of us buy every day. We need to immediately lower our corporate tax rates if not eliminate them altogether. This will insure our corporations, the ones that employ most of us, stay healthy.

Maybe the Old Days Weren't So Bad

Check out what your taxes were in 1913. Notice the entire 1040 was only 4 pages long in 1913. Today, the 1040 Publication is 155 pages! Comparing 1913 to 2007, I paid over 8 times more in personal income taxes. Throw on the FICA taxes and the difference gets even more obscene.

So what benefit have we gotten as taxpayers with our higher income taxes? I am not sure, but I do know that government is much bigger. We certainly have a better military. We have better roads, but that is really a function of the gasoline tax (Oh yeah, another tax!), not the income tax. Have we got better education? In many cases I would say it is very debatable, but then that is a function of local property taxes (yet another tax).

What we have gotten is a bigger and more inefficient government. This is the ideal machine for taking (aka stealing) tax dollars and creating little to no value for society. I am sure John Adams would be appalled at what has become of the government he worked so hard to create.