Utter Nonsense: How Taxes Really Affect Business Investment.

Both parties have embraced the myth that tax cuts stimulate business growth, despite the obvious evidence to the contrary with respect to small businesses and, in so doing, they have embraced a pernicious falsehood.

First, let's redefine small business.

The SBA defines a small business as an enterprise that has anywhere from 100 to 1500 employees, with annual receipts ranging from $500,000 to $21.5 million.

This definition is very different from the colloquial definition which is more closely aligned with the "mom and pop" concept of small businesses ranging from the small grocery store to the sole practitioner in medicine, dentistry, law and accounting - the four professions with which most people come into contact on a regular basis. This is what the average person thinks of with respect to small business.

We can easily and accurately, then,  redefine a small business as anyone who operates as a sole proprietorship or a Subchapter S corporation, as opposed to a limited partnership or a Subchapter C corporation, because these are the two options available to small business people.

The differentiation is clear:  In the former cases, our new definition of a small business, there's a direct relationship between the net profits of the business and the taxable income of the business owner, because the net profits of the business constitute the taxable income of the proprietor.

In case after case, ever since the implementation of the income tax in the United States, tax increases have resulted in economic growth, while tax cuts have resulted in economic stagnation.

The reason for this is self-evident to anyone who has ever filled out a form 1040 tax return:

When you own a business, regardless of whether it is a sole proprietorship, a partnership or a Subchapter S corporation, you have to claim the net profit from your business on your tax return, if there is a profit, or show the loss if there was a loss.

If we increase the federal tax rate on personal income, business owners will everything they can to reduce their net profit....and that means hiring additional employees, expanding facilities, buying or leasing equipment, or making other capital expenditures that can be written off while helping to generate future profits through increased productivity.

If we decrease the federal tax rate on personal income, the business owner is less inclined to make those expenditures because they will get to keep more of those net profits. 

It's as simple as that....but both political parties have consistently avoided admitting that this is the case. 

Tax increases generate growth because they increase the incentive to re-invest profits into the business activity....or to start new businesses to shelter the income from taxation.

President Obama's decision to extend the Bush tax cuts for tax payers with up to $250,000 in NET INCOME (after deductions) was a palliative designed to upstage the Republicans tax agenda....but the net result of any tax cuts will be job losses and economic stagnation. 

The Republican's insistence upon tax cuts as the solution to our economic problems is belied by the fact that, although we have the highest effective income tax rate among the developed nations of the world, we nevertheless have the strongest economy.  If the Republican economic theories were correct, we would be coming apart at the seams....and we're not. 

The real Republican agenda is that they are trying to starve the beast....government....by cutting off tax revenues. 

The myth that tax cuts would generate increased tax revenues from increased taxable income is belied by the previous analysis.  Tax cuts don't free up capital for re-investment.  They free up capital for re-distribution to business owners and shareholders.

 

 

 

Views: 505

Comment by Sheila Luecht on July 10, 2012 at 9:03am

"The real Republican agenda is that they are trying to starve the beast....government....by cutting off tax revenues."

Best line. 

Comment by Alan Milner on July 10, 2012 at 9:38am

I thought it was one of several.  

Comment by Anne Armand on July 10, 2012 at 9:41am

I have no idea what their agenda is. Just like the other side they will say and do what it takes to get elected. As I keep reiterating, I am disgusted with them all. No matter the plan it never gets enacted as was proposed. The best ideas are cut up into slices and delivered short. Just enough to play with the market. I am so bah humbug. Saddened by it.

Comment by L in the Southeast on July 10, 2012 at 10:36am

As far as I can tell, neither candidate is interested in talking about the details of anything.  Slogans, talking points and shenanigans designed to pull the electorate off topic make up the majority of the political "conversations" in the media.  I had never thought about this topic the way you have described it here. It makes all kinds of sense to anybody interested in making sense instead of manipulating themselves into the White House. 

Comment by Walter Blevins on July 10, 2012 at 11:51am

Yeah, I find it hard to disagree with you on this.  I spent 15+ years in business and economic development and, quite frankly, saw as much, if not more, business growth and expansion during "down times" as during "good times"--especially in the realm of small business (using your definition).  These folks typically were looking to make a better living for themselves and for their employees by starting or growing a business.  And economic development and a "positive business climate" had more to do with the willingness of governmental bodies to cooperatively work with business than it did in subsidizing them either through tax incentive or grant.

Comment by Alan Milner on July 10, 2012 at 12:27pm

What I don't understand, Walter, is how something as self-evident as this NEVER gets mentioned in the media, because it clearly contradicts everything that the media and the political parties are telling the people.  I just don't know how to get the message across.  I have friends who really should know better who are quoting me chapter and verse from the republican talking points about the economy and sometimes I find myself beginning to agree with them until the fallacies surface.

Comment by koshersalaami on July 10, 2012 at 12:31pm

My first comment on OurSalon. (By the way, I sent you a note asking you what you thought aobut this site as an alternative. I guess you've answered me.)

"Tax cuts don't free up capital for re-investment. They free up capital for re-distribution to business owners and shareholders." Yup. There it is. When the best way to shelter income from taxation is to invest that income in your business, you get jobs.

That's half the answer. There's another half:

When the Government collects more taxes, the Government creates more jobs with that money, which leads to more taxpayers, more taxes, more customers for businesses which expand to respond and in turn still more taxpayers and more taxes.

Both halves add up to the same thing: Higher taxes means the economy does better, not worse.

Comment by Anne Armand on July 10, 2012 at 12:39pm

Does anyone out there think that altruism or job creation is the aim of a start-up or a small business? Jobs are created because businesses need help.  It is not the intention, but the result. When the work is shipped out or the job becomes obsolete...whoops....there goes the employee. In the end the boss makes more. As it should be. The goal in business is a positive result. I think we would have to agree that Romney knows how to grow successful business. Growing the entire economy with all of our trade obligations,debt and deals is another thing.The space program created jobs. Not sure we need to replicate that...but we must have some major blast that inspires as well as creating new and useful product. Sorry for restating the obvious. My son has been a successful construction manager for years. He is also out of work. Step sons having same problems. Lack of funding, reorgs, health care cost...All have had one result...business are not hiring and bigger firms are doing more with less employees.

Comment by Alan Milner on July 10, 2012 at 1:04pm

Kosher made an important point.  I will expand further.  Public sector jobs have one glaring advantage over private sector jobs:  The rarely require additional capital investment for space or equipment and, when they do, those are small potatoes compared to the infrastructure costs of expanding a private business.  More to the point, public sector jobs don't involve middlemen....the capitalists....who take their percentage out of every single salary slot.  I am not a communist.  I'm not even a socialist.  I am a pragmatist.  I like things that work.

Anne's point about health care costs requires a clarification.  We have become fixated on the cost of health care INSURANCE rather than the cost of health care itself, which is the real problem.  It doesn't matter how we pay for it, if our health care costs are twice those of any other developed country, with less than half the positive outcomes. 

The problem with health care are the capitalists taking their percentage out of every bed and each procedure.  Even with the hospitals are non-profits, they are actually amalgamations of private, for-profit businesses operating together within the context of the "non-profit" hospital.  The nonsensical statement that Obama Care will result in death panels belies the fact that private insurers make those same decisions every day without any government oversight.

  

Comment by Anne Armand on July 10, 2012 at 1:19pm

Alan, am I wrong, when the government creates new departments are you telling me that they are not expanding their facilities? My experience is otherwise. Admittedly not as much as the private sector. When the government expands and purchases we all pay for it. There is huge waste and obsolescence in government. Since they won't go under they don't care about their bottom line. Their deficits mean squat. The average business fails under the same circumstances.

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