By Ed Dedelow
Bull. Prognosticators claim that if “the rich” pay too much in taxes, they will simply quit working. While this may be true for a few, it is a foolish effort to sway those in power who make the decision.
Saying this misses the more practical reason that with high taxes, regulation and litigiousness, investments will not make money. Let’s look at the numbers. If tax rates were 90%, there would not be much revenue left over for a business to cover receivables, inventory, new assets, debt payments, and dividends.
Here is what it would look like. If a business had a 20% net profit (which is high) and taxes were 90 %, that business would need to put up 98 cents to make 2 cents. Why, because businesses are taxed when a sale is made, not when cash is received.
Look at what happened under President Carter’s administration in the late 70s when tax rates were 70%. The US manufacturing base declined, inflation rose to over 15%, interest rates increased to over 20% and a huge recession followed. With businesses investments failing to produce viable after tax returns, money for expansion dried up, facilities declined and many businesses failed.
Congress attempted to resolve the problem then, as now, by stimulating the economy. From the late 60s, to early 80s, tax laws were modified to encourage investing in real estate. These tax shelters distorted real estate investment returns to create tax losses that could offset other income. What happened? Investment monies flowed to the shelters and manufacturing suffered. Real estate, on the other hand, became over built, foreclosures ensued, and, as with today’s economy, banks that had loaned money that funded real estate failed. Sound familiar?
This changed when President Reagan lowered tax rates and limited real estate losses that could be offset against other income. With a reduced tax rate, other investments became practical. Inflation and interest rates declined and the economy grew. Ideas that had been on the shelf, became reasonable, and investing and the stock market, exploded.
Unfortunately, in the Reagan years, tax receipts also grew and government on all levels spent every penny, plus, while passing a multitude of regulation.
The high cost of government in the US is why most new jobs here do not come from large
businesses? It is simple, large businesses can not compete in a world market while paying the 2nd highest corporate tax and the highest or near highest cost for litigiousness and regulation. Few investments measure up to a 40% tax rate when compared to countries with lower rates.
If taxes are reduced to 30%, 20% even 15% and regulation is cut, more ventures will work financially and the economy will grow. You see, the rich quit investing (in the US) when they can not make money. Simple, eh?
Why Not Cut Business Taxes? Is The Reason Political Correctness?
Many politicians actually believe revenues would suffer if corporate tax rates were cut, but the reality is that cutting corporate taxes is just an unpopular idea. Doing so, however, will spur investment, put millions of workers back to work and taxes from the workers will dwarf the business tax cuts.
Why must the unemployed suffer for political correctness? Corporate taxes averaged only $290 billion in the years 2001-2008. That is only 6% of the total of federal, state and local taxes and 1/3 of the 2009 stimulus bill.
Manufacturing Is Dead In America?
Bull. Even given the high cost of manufacturing in the US, John Deere exports 2/3rd of what it produces, Ford Motor competes with foreign manufacturers and many foreign car manufactures, such as Honda and Toyota, build in the US.
Of course, these manufacturing plants were built years ago at a much reduced cost, so we still need to cut taxes, regulation and litigiousness to spawn new manufacturing facilities. Investments in new facilities is now too costly with our high cost of taxes, regulation and litigiousness. Cut these burdens and American will again expand manufacturing. Want to see a manufacturing resurgence in the US? Make it profitable, and it will happen.
Think about it. Think outside the box.
The Scientific Capitalist