The Learning Curve

New tricks for an old dog.

Ridiculous argument against income tax increase

The ridiculous argument against individual income tax increase goes like this:

Corporate tax rates are already too high. Any increase in the corporate income tax would cause a flight to other countries and take away from businesses’ ability to expand employment.

The obvious flaw in this argument is the bait and switch. Starting off with the topic of individual income tax rates, the argument immediately switches to a discussion of corporate income taxes.  They are not the same critter.

The less obvious flaw in the argument is the fact that many, if not most, households are not employers and never will be.  Most individual taxpayers are employees themselves, and only the very wealthy hire  personal servants, cooks or pool boys.

The logic is backwards. For those small businesses which opt to pay Federal Income Taxes as Subchapter S entities, as with any other rational business, new employees are added because the business value employees generate exceed their total cost. Businesses do not make profit in order to hire employees, they hire employees to make a profit. If hiring a new employee adds to a business’ bottom line, it would do so regardless of the income tax rate in effect. The profitability of a business, as such, is not affected  by the income tax collected. The profits must come first for a business to pay any income tax at all, and the costs of employees are deductions.

Take a simple example. If a married couple with a joint income of $300,000 in taxable income after adjustments and deductions paid $1000 per year less in taxes, would that couple use the money to hire an employee or would they take a vacation?

I think the answer is obvious.  You can’t hire a new employee for $1000 per year, so increasing the taxes by $1000 per year would not result in anyone losing their job directly. If you can afford a pool boy, $1000 per year one way or another will rarely be the tipping point.

If every household in the top 3% of earnings paid an average of $1000 per year in additional income taxes, the increase in Federal revenue would amount to about $350 Billion a year, and it would have a near zero impact on the unemployment rate.

The other argument I’ve recently read is that Federal Income Taxes “take money out of the economy,” which is absurd. Taxes don’t take money out of the economy unless the government stuffs the money in a mattress and sits on it.  Governments spend the money, as many complain, and they do so, “in the economy.”

The arguments against increasing individual income tax rates on top wage earners is an Alice through the looking-glass distortion of anything that might pass as reasonable. It’s just a tad bit insane.

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Written by Tom Fox

07/18/2011 at 1:06 pm

Posted in Politics

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