Thursday, January 13, 2011

How Does A 60% Marginal Tax Rate Promote Growth?

It is rather counterintuitive to think that raising the top tax bracket to 60% would result in significantly greater economic growth. But nonetheless, there is a great deal of historical evidence and mathematical modeling that proves it is indeed true. A high marginal tax rate does indeed promote significantly greater economic growth.

I'm not going to argue the data with anyone, since the numbers speak for themselves. In today's mind-numbed sound bite infested attention deficit world order, debate is no longer about supplying and defending actual facts. It is all about sounding good. Making something sound believable to a person on the street with 81 IQ. The echo chamber cares not about truth, statistics, or raw data of any type. Sad but increasingly true. People buy it, to their detriment, over and over. I dont know why Charlie Brown always falls for Lucy's trick, but that is exactly what happens when people accept something because it "sounds good". At any rate, I am going to play their game and attempt to explain how a 60% marginal tax rates is good by making it "sound good".

For the record, I do believe that 10-20 years from now we will all suddenly agree that a 60%+ tax rate is indeed for the better. (Assuming our nation survives this current era of intellectual raping of the citizenry by Mr Stupid and his gang of media cohorts.)

The Machine Shop: A 5 Year Analysis of High vs Low Tax Rates

Ok we're going to visualize two scenarios. In each scenario, one lucky guy wins a few auctions, acquires a few pieces of equipment for dirt cheap, and decides to start his own machine shop. He has little debt and his first year revenue minus expenses is $150,000.

What he does with that money depends greatly on the marginal tax rate. If the tax rate is low, he can and most likely will be tempted to take that money as personal income and spend it on personal consumption. Because he can. Because that is what we are trained to do these days. Spend spend spend.

However if the tax rate is 65% he is highly likely to fold that money back into the business rather than taking it as income. So instead of making $150k, he takes just $75k and uses the other $75k to buy a new piece of equipment. In doing so, he is now able to generate additional revenue. So after the second year, revenue is up to $175k. The next year he hires an employee. Now, after 3 years, revenue is up to $220,000. He hires another employee. After 4 years revenue is 260k. And he hires yet another worker. After 5 years revenue is $300k.

So here he is after 5 years. He has 3 employees, generating twice the revenue and supplying 3 others with income to spend out into the economy. Sure, he could have made more income if he didnt reinvest in more capital. But it makes no sense to take more income for yourself when you have to pay such high taxes. By reinvesting each year he now has a business that he could sell for twice as much. So even though the tax rate is double, the actual money he can make by selling the business remains the same. The big difference is that he has created 3 jobs. And that is what really contributes to growth. In a low tax environment, he would have been tempted to take more income out of his business and spend it on consumption. That does provide a small boost to the economy, but at the expense of job creation. As well all know this is exactly what has been happening over the last 10 years. Jobs are not being created, and incomes for the rich have been increasing dramatically. Knowing all this, does it makes sense why they hire 10,000 media and academic goons to promote and parrot the idea that low taxes is better. Of course it is better. Better for them. From here, the people have two choices. Either we reverse course and see their rhetoric for what it is. Or we continue down this road until the middle class is wiped out and the rich own 99.99% of the country.

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