Democrats are pretending there is a deal in the works to extend the Bush tax cuts.\u00a0\u00a0 Of course what they mean is they want to extend tax cuts only for the middle class.\u00a0 This is really no compromise at all.\u00a0 We are about to find out if Republicans got the message from the voters in the mid-term election or not.\u00a0 I sure hope Republicans don\u2019t roll over and compromise on this as it will be disastrous for the U.S. economy.<\/p>\n
\u00a0I remain astonished that no one, either Republican or Democrat seems to be able to understand this issue.\u00a0 All Republicans say if that we can\u2019t raise taxes on anyone during a down economy.\u00a0 Even Republicans seem to accept the premise that failure to increase taxes on the upper income people will result in a loss of revenue. \u00a0They accept the concept that failure to raise taxes results in less revenue.\u00a0 But the problem is that this is unproven and is probably false.\u00a0 It is incredibly simple.\u00a0\u00a0 It is better to take in 35% of a lot than 39.6% of a little.<\/p>\n
This would be like McDonalds losing business because Burger King starts charging a much lower price.\u00a0 What would McDonalds do?\u00a0 Would they raise prices even more, because they want more revenue?\u00a0 If they did that, they would probably end up with even less revenue because they would lose more customers.\u00a0 But, if they lower prices to compete with Burger King, they might gain more customers and revenue might go up.\u00a0 It is certainly less likely to decline.\u00a0 This is really Economics 101.<\/p>\n
I prepared the following analysis, which makes this really clear.\u00a0 I assumed that the total taxable income in the U.S. is about $1 trillion and that the top bracket represents 25% of tax revenue or $250,000,000.\u00a0 (That is pretty accurate).\u00a0 I then took the $250 billion of tax revenue from the top 1% and divided it by .35 to come up with an estimate of the current taxable income for the top 1%.\u00a0 The result was an estimate that current taxable income for the top 1% of wage earners is about $714,000,000.<\/p>\n
Let\u2019s assume that taxes are increased from 35% to 39.6% for the top 1% of wage earners, but as a result the economy declines by another 1%.\u00a0 Taxable income for top bracket decreases from $714,000,000 to $706,860,000.\u00a0 At the increased tax rates of 39.6% tax revenues increase from $250,000,000 to $279,916,560.<\/p>\n
But, if the tax rate is left at 35% and the economy grows by 1%, tax revenue increases even more.\u00a0 Taxable income for the top bracket increases from $714,000,000 to $721,140,000.\u00a0 Even at a 35% tax rate, taxable revenue increases from $250,000,000 to $281,244,000.\u00a0<\/p>\n
In other words tax revenues go up faster from a recovering economy than they do from an increase in taxes.\u00a0<\/p>\n
If we change the percentages, the difference is even more dramatic.\u00a0 \u00a0For example let\u2019s assume that the economy declines 4% if taxes are increased and the economy increases by 4% if the tax bracket remains the same.\u00a0 If the economy declines 4%, the taxable income for the top 1% will decrease from $714,000,000 to $685,440,000.\u00a0 There will still be an increase in tax revenue, but only from $250,000,000 to $271,434,240.\u00a0 On the other hand, if the economy takes off and grows by 4% there will be a much larger increase in tax revenues.\u00a0 Then taxable income for the top 1% will increase from $714,000,000 to $742,560,000 and tax revenue will increase from $250,000,000 to $289,598,400.<\/p>\n
Obviously, the quickest way to increase tax revenue is to increase taxable income, not tax rates.\u00a0 There have been several cases where raising tax rates resulted in a reduction in taxable revenue.\u00a0 That is exactly what happened when New Jersey passed a millionaire\u2019s tax.\u00a0 Millionaire\u2019s just moved, and the state got less money.\u00a0 This is because the more rich people are taxed; the more likely they are to hide income.\u00a0 \u00a0This theory is consistent with the tax revenues following the Bush tax cuts.\u00a0 The top 1% of wage earners paid a higher percentage of total tax revenue after the tax cuts than they did before.<\/p>\n
In addition there is a huge difference between the way the top 1% spend additional money and the way the middle class spends additional money.\u00a0 When lower income people get more money, they tend to spend in on food or clothing.\u00a0 But higher wage earners are much more likely to spend additional money on investments.\u00a0 After all, they are already rich, so they usually don\u2019t need to spend more money on food or clothing.\u00a0 The things they do spend money on are the things that drive the economy..<\/p>\n
It\u2019s too bad that, so far, no politician in either party seems to understand the obvious.<\/p>\n
TDM<\/p>\n","protected":false},"excerpt":{"rendered":"
Democrats are pretending there is a deal in the works to extend the Bush tax cuts.\u00a0\u00a0 Of course what they mean is they want to extend tax cuts only for the middle class.\u00a0 This is really no compromise at all.\u00a0 … Continue reading