Wednesday, September 8, 2010

Taxes vs. Growth?

Driving to work this morning a story on NPR intrigued me.  Obama has been making an issue of his opposition to allowing the Bush tax cuts for the rich to continue.  The conservative argument against this is that allowing the tax cut to expire will hurt small businesses, thus hurting growth.  Apparently the liberal talking point that only 3% of small businesses will qualify for a tax increase is based on faulty numbers.  If you don't include people who aren't serious small businesses - such as people who claim side-business income, etc. - then the figure could be more like 50%.  In NPR's story, an economist claimed that an effective tax rate increase on the wealthy would indeed have a negative impact on growth.

OK, so I've struggled with this before.  I like taxes.  I think there are many things that they pay for that are very valuable to the country.  But this doesn't mean that they don't slow growth.  What if, as conservatives generally  claim, the reduction in growth actually comes at the expense of what good the taxes will have done?  That is, what if more growth is ultimately a net gain to the common good - via jobs, innovation, cheaper goods, etc.?

Of course there are some things that simply need to be paid for - I'll argue - because they are correcting an already unconscionable imbalance in civil rights.  Things like education for poor kids, child care for single mothers, or crucial regulationary activity, like national defense, should be a highest priority.

But what about at the margins?  Maybe a reduction in growth is a pretty bad thing after all.  Would my desire for more taxes be coming up against some cold hard facts?  Like a good ideologue, I figured I had to at least do a little critical maneuvering.

Why, for instance, are small business owners making so much money?  As I understand it, this tax applies to business income, or profit.  One of the claims against raising the tax rate is that it would deter investment, discouraging business owners from putting more money into their businesses when forced with the prospect of not being able to get as much profit out.  But this doesn't make sense to me.  (And as I am not a small business owner, go figure).  But wouldn't a lower rate actually encourage owners to invest less in their businesses?  Because if a low rate means more pocket money, then there is less need to put in for deductibles.  An extra $50k at the end of the year would be worth much more after taxes.  At a higher rate, that $50K would mean less money in the bank, and so the incentive would be even greater to put it back into the business, whether by hiring more staff, giving them more benefits, raising wages, etc.

Am I missing something here?  Doesn't a lower tax rate on incomes over $250k mean that they will have more money in their pocket, as opposed to investing back into tax-deductible business expenses?  Isn't the "nudge" from the government essentially saying, "Just put it back in the business."?

I suppose the piece I may be missing here is a ceiling on deductibles.  Maybe if there is a limit on deductions, pouring it back into the business doesn't really save money anyway.  A lower rate might allow owners to keep more of their profit, thus making the decision to put more of it back into the business easier to swallow.

So I suppose I'm not sold either way.  In the end, I want more taxes to pay for the things I believe the government ought to do.  And I believe the rich ought to pay a greater share of the tax burden, as they have obviously benefited so much more form society.  But if a higher rate, despite my wishes (!) turns out to put a serious drag on growth, at least enough to crowd out benefit from government programs, then I suppose I would have no choice but to concede.

Until then...

1 comment:

  1. I, as a small business owner, can't believe the 50% number - half of all small businesses make a quarter million dollars in PROFIT? Really? Frankly, I don't think you're a small business if you're raking in that kind of profit.

    The really bad thing is that taxes were cut during a "happy" time - leaving further cuts that you'd like to use during a recession painful in another direction - deficits. If taxes had been kept higher during the good times, then we'd have more room to move now. As it is, we can either address deficits or tax cuts/growth - not both.