Sunday, March 22, 2009

Pure Hogwash

We continue to hear about "socialism" and "class warfare" in reference to Obama's intention to allow the Bush tax cuts to expire for the top income brackets. This is absolute rubbish. Most everyone, including Adam Smith, Andrew Mellon, and even G.W. himself has professed support for progressive taxation. The idea being that, the more one benefits from the social and economic structure as it is, the more one ought to be giving back. However, the Bush era tax reforms arguably made our tax structure less progressive, not more. We also hear that the proposed tax hikes on households making $250,000 and over will "hurt small business". Ain't necessarily so. The definition of "small business" is varied, but no matter how it's defined, most small business owners make less than $250,000 per year. The rub, however, according to some folks, is the fact that raising taxes on the upper income brackets has the effect of taxing about 2/3 of small business income. These are the folks who want to avoid taxing capital at all costs, apparently even at the cost of bringing down the financial system altogether.

Here's how I see it: Certainly taxing capital too much can have a dampening effect on innovation and economic growth. We need to reward risk to some degree. Rewarding risk is part of what makes our system in the U.S. different from everywhere else, and why we are leading the world in health care innovation as well as cost. But taxing capital too little leads us into a top heavy system, with an unsustainable chasm between the haves and have nots. It also, in my estimation, leads to exactly the kind of economic collapse we're experiencing right now. Too much capital sloshing around the economy needs somewhere to go, leading in turn to more and more exotic "investments". This phenomenon is very well outlined in an episode of This American Life titled "The Giant Pool of Money".

Finally, this is a tax on profits, not gross income. Therefore, any enterprising person whose business is netting somewhat more than $250,000 could theoretically come up with myriad ways to invest a few (or many) more thousand a year and come in under the limit. Hire a few more people. Invest in new equipment. Weatherize your building, if you have one. To my mind this kind of a tax hike, especially in this climate, makes sense not only because it puts more of the tax burden where it belongs (on the folks who are benefiting most from our economic system), but because it can encourage more investment in the "real economy": e.g. labor, durable goods, and innovative services. And in a time when the basic foundations of our economy are shifting due to environmental and other concerns, small business owners would do well to spend money positioning themselves to respond profitably.

A postscripted "Deep Thought"...I love this quote, which I discovered thanks to the paraphrasing of an FB friend:

"I like to pay taxes. With them, I buy civilization."
-Oliver Wendell Holmes, Jr.

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