It started out with a simple question:
If cutting taxes was good for the economy, why were the Bush years lousy with a net loss of jobs, and the Clinton years, where he raised taxes, so wonderful to all income levels?
If cutting taxes is good for the economy, how can that be?
This goes against common sense, until you see the details. The republican argument is simple: if you cut taxes, businesses have money to invest and grow jobs.
Sounds good… but we tried it.. and lost jobs. WTF
The other side of the argument goes like this: when you raise corporate taxes, they have less money and invest less. If taxes squeeze out the profits entirely, they won’t bother to invest. The money will go to China.
Sounds good. really if I was going to lose money, I’d invest in China too…
Again, we tried it, and the economy mushroomed. Everybody made more money… The top one percent! The bottom 10 percent! All count the Clinton years as the best in their lives.
Now if I have a theory that sounds good but doesn’t work, like using leaches whenever I get sick, and I keep doing the same thing over and over, what does that make me?
So why this strange twist? Where what should work, doesn’t, and what should fail, becomes a thriving success?
The answer is in human nature. When you cut taxes, people have more money. Obviously they would want to receive the highest investment on that extra money possible. It goes overseas and creates not one new job. I invested overseas during the Bush years, often to 25-30 percent rates back… Really, why wouldn’t I?
When you raise taxes on corporate income, it pays to reinvest as much money as possible back into your business, so it does not get taxed. That money creates jobs, whether it is in your expanded R&D department, you new office building, or taking your employees out to eat, simply to keep Uncle Sam from taking that piece of your money..
Here’s the part that cracks me up. The Democrat plan causes domestic investment to soar, just what the Republican plan was supposed to do. The Democrat plan actually cause less tax to be paid per business, because they reinvest a lot of their profit; they report less income, they pay less tax.
So if you want to get the economy rolling, remove the Bush Tax cuts. Let them expire. As they do, it becomes imperative for each business hide some money back into their upkeep.
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November 30, 2010 at 4:21 pm
Duffy
“When you raise taxes on corporate income, it pays to reinvest as much money as possible back into your business, so it does not get taxed. That money creates jobs, whether it is in your expanded R&D department, you new office building, or taking your employees out to eat, simply to keep Uncle Sam from taking that piece of your money..”
Except it doesn’t work that way. Businesses treat taxes as overhead. That. Is. All. They build the increased tax cost into the cost of the product or service.
If I am selling widgets for $10 the cost breakdown goes something like this:
$4 for cost of product
$1 for marketing and advertising
$1 for physical plant (i.e. rent/utilities)
$1 in taxes and regulatory compliance
$1 for labor
$2 for profit
If you make my taxes and regulatory compliance $2 it merely changes that value in the cost composition and the product is now $11. Either that or I narrow my margin to $1 which gives me less money to use for growth or productivity improvements not more.
Lastly, corporations do not typically spend to burn cash as a tax avoidance measure. The spending you are talking about is driven by strategic and less frequently tactical matters. Those considerations are driven by a great many things typically market strategy, corporate structure, market capitalization, blah blah blah.
December 1, 2010 at 10:52 am
pandora
But… if a company reinvests money isn’t there a tax write-off?
December 1, 2010 at 4:54 pm
Duffy
Sometimes. Depends on what you’re investing in and usually those write offs are depreciation of assets over a very long period (i.e. 15-20 years). Sort of like buying a house to avoid the two income no kids taxation levels. You do end up with a tax writeoff for the first year but the subsequent years are smaller and moreover you’re on the hook for a long term capital investment (the house).
December 2, 2010 at 12:14 am
Name: Mark
They should extend all tax cuts, but create a suggested contribution page where all the rich liberals who think taxes should be raised can give at a higher rate in exchange for a commemorative Obama plate set from The Franklin Mint with a certificate of authenticity signed by Chocolate Jesus himself. Everybody wins!
December 2, 2010 at 2:43 am
kavips
Actually, I’m glad Duffy gave us an outline, I’ll use it well…
Here’s what happened in the 90′s…
We increased the tax rates. That’s all that happens. Congress doesn’t increase taxes, they play with tax rates.
Therefore using Duffy’s breakdown, a company has a choice to spend that additional $1 on
a) marketing and advertising
b) physical plant
c) labor
d) additional taxes.
He can keep his price at $10, or he can raise it to $11, or he can raise it to $12. He can do whatever he wants. He will have to account for his competition trying to undercut him if he goes too high.
He can choose where he puts his money in each or any of those categories. If he puts it into building cost, he won’t pay tax on it. Therefore, surprisingly, the tax rate increase doesn’t affect him at all.
But, what all that building does do, as every business starts putting money back into their own business, is grow our economy quickly. Very quickly.
Simply put, allowing the tax cuts to expire, would be the best thing America has done since 2000. Whatever the increase is, would flood into our economy, so business would not have to give it up to government…
Now extending the tax cuts with rather severe penalties attached, payable out if that extra money was not put back into one’s business, …would also accomplish the same thing.
Getting cash flowing through out our economy. The same effect would occur. It is just easiest to accomplish by letting tax cuts expire….
December 2, 2010 at 2:46 am
kavips
Mark; your solution does nothing to fix the economy outside of Chadd’s Ford, PA..
Our’s does.
December 2, 2010 at 2:55 am
kavips
And Duffy hit on exactly why tax cuts do harm our economy.
He stated:
the product is now $11. Either that or I narrow my margin to $1 which gives me less money to use for growth or productivity improvements not more.
He is assuming he will have to pay more taxes. He won’t. Just his rate climbs. He pays a higher rate on what he earns, and if he earns nothing, he pays no taxes… The largest corporations in the world, pay very little taxes…
He was keeping 2$ before the tax cuts expire. Now he is keeping 1$. but… that other one dollar, (unless he was totally stupid) has already been put back into growth and productivity enhancements… Leaving him one whole dollar that is his to keep for himself…
Before, when he had 2$ to keep for himself. How much did he play with? And how much did he put back into real improvements that created jobs?
All that raising a tax rate does, is sort of force him to spend a certain amount on growing the economy., He doesn’t have to.. He can pay the government unnecessarily if he wishes… but that is up to him.
This process works… because we did it in 1993. later in 2001 when we created the tax cuts, that extra dollar stopped getting put back into our economy. Most of us put it into the third world. The Chinese loved us for it… ..
Expiring the tax cuts will be the best thing this nation ever did… since 1993.