If you lower taxes on the rich, or on big corporations, they will create jobs.
Or will they?
The talking point is that taxes are too high, and if lowered businesses would start to hire. I guess the other talking point is that rich people are hiring. I really don’t know what an individual rich person’s taxes have to do with companies who hire, but lets lump them in since that is what those who want lower taxes for them do.
The truth – when someone is handed something for free, they have no incentive to change their behavior. The wealthy, for example, can hand off their wealth when they die to their kids, tax-free, up to $5 million right now. This creates an entire class of rich kids who have no incentive to work, or create businesses, or run their parents business, or do anything other than support the Champaign and night club industries.
Conversely, if taxes were exorbitant, those rich kids would be forced to learn something from their parents about how to create businesses and jobs.
Taxes can also incentivize specific behavior too. For example, when the rich are given the lowest possible tax rates on capital gains – or gains from investments – they are specifically being incentivized to invest – except investment ala the stock market and hedge funds create nothing of value, and that is where the vast majority of capital gains comes from. If profits from the stock market and hedge funds were taxed at 50%, the stock market would do what it was intended to do – provide long-term capital for well run companies. Instead it is now a casino thanks in large part to our tax code.
If the wealthy had a tax rate of say, 70%, they would have more than twice the incentive to earn money than if their tax rate was only 35%. For example, at a 35% tax rate on a $1 million income they would take home $650,000. But at 70% they would take home only $300,000.
Now those who don’t like this idea (usually the rich, or politicians who want to help the rich) would say this kind of tax rate would remove their incentive to earn since so much is taken away from them. Nonsense, that is like saying that someone will choose not to be rich because it isn’t easy. First, it isn’t easy to become rich (unless you are handed it) and someone capable of creating profitable businesses, or earning tons of income, would not suddenly decide to be poor. They would attempt to earn more so that they could be as wealthy as they wanted to be. The reverse is therefore more likely to be true – at a lower tax rate this same person or company is likely to feel satisfied far sooner and lose interest in working harder or smarter for even more money.
As for businesses, expenses are deducted from earnings before taxable income is calculated. So the more a company spends – for instance, on employees, the less taxable income they have. So when taxes are very low, they have no incentive to spend on anything. We can see that today as corporate earnings are at record highs and we have the highest unemployment in a generation.
High tax rates actually force a company to look for excuses to spend. Low tax rates force a company to look for excuses to not spend.
In its simplest terms, “corporate welfare”, or a free pass with low or no taxes, reduces a company’s incentive to spend and therefore grow, just as individual welfare reduces an individual’s incentive to work.
The solution to today’s economic problems doesn’t have to be exorbitant taxes, it can simply be fair taxes (or as described here it doesn’t have to be ANY new taxes). Or targeted taxes. Since taxes ALREADY incentivize behavior, and given the recent global financial crisis, the excesses and corruption on Wall Street, record corporate earnings, and high unemployment, it is clear we have been incentivizing the wrong behavior. It’s time to go back to real capitalism, because right now, by transfering wealth to the wealthy, we are becoming a plutocracy, an oligarchy and eventually a fascist state. Those who fear socialism are creating a far worse state.