To Tax or Not to Tax

3

I just ended a very brief phone call with my brother from San Diego where in just about 10 min­utes we dis­cussed the entire Debt Ceil­ing prob­lem and the issue of taxes. Of course our cur­rent tax struc­ture is very com­pli­cated and requires CPAs and attor­neys to under­stand, but the under­ly­ing con­cept seems to be the ques­tion of the day: should the gov­ern­ment raise taxes or not?

Con­ser­v­a­tive thought on the mat­ter is very sim­ple: no new taxes. Most econ­o­mists would agree that the last thing you want to do in a recession—or recovery—or what­ever you want to call it—is to raise taxes. Rais­ing taxes now would pull more money from the econ­omy and decrease our indi­vid­ual pur­chas­ing power and—arguably—our invest­ing power. This is dur­ing a reces­sion mind you. But the Repub­li­cans and Con­ser­v­a­tives have made a hard-lined stance against rais­ing taxes ever—recession or no recession—NO NEW TAXES.

The argu­ment goes, “Rais­ing Taxes on the job cre­ators hurts job cre­ation and slows down the econ­omy.” So, by decreas­ing taxes we would stim­u­late the econ­omy and cre­ate jobs.

This is the same talk­ing point we’ve heard relent­lessly as far back as most of us are old enough to remem­ber. Under­neath this argu­ment are the fol­low­ing impor­tant assumptions:

  1. Job Cre­ators will cre­ate jobs if taxes are low.
  2. Lower taxes moti­vates Job Cre­ators to invest in their business.
  3. Lower taxes encour­ages Job Cre­ators to spend por­tions of their profit.

Within 10 min­utes we were able to see the obvi­ous flaws in these per­va­sive talk­ing points.

  1. Busi­nesses will (and right­fully SHOULD) only cre­ate jobs when there is more DEMAND than their cur­rent work­force can fill for the var­i­ous prod­ucts they offer. Any­thing more would be bad busi­ness practice.
  2. If the cost of invest­ing in their busi­ness is higher than the cost of hold­ing onto their prof­its, then busi­nesses will hold on to their prof­its. VERY SIMPLY: the costs of invest­ing are INTEREST, EXPENSES, and RISK. The cost of hold­ing onto prof­its is TAXES. It is purely an eco­nomic deci­sion. Why invest prof­its when it is cheaper to sim­ply hold on to them? Sim­ply put: if the tax code is such that it is cheaper for me to sit on my prof­its then I have no incen­tive to Invest. There is no rea­son for me to research and develop new prod­ucts because I get the same result with­out the expenses and the risks through the cur­rent tax code.

Let me give you an exam­ple: Gen­eral Elec­tric posted $5.1 Bil­lion dol­lars in prof­its and paid $0 in taxes. In fact, they received $3.2 Bil­lion in tax ben­e­fits sub­si­dized by the Amer­i­can people—you and I. Gen­eral Elec­tric has no need to invest in the econ­omy beyond any­thing it is cur­rently doing. Because of our cur­rent tax struc­ture, the com­pany paid less in taxes than the aver­age US tax­payer. What’s more, GE got a $3.2 Bil­lion rebate. QUESTION: What invest­ment could Gen­eral Elec­tric have made dur­ing the same time period that would have been as effort­less, risk free, and prof­itable? ANSWER: None.  How am I sure of this answer? If there was another way for them to make more money more effi­ciently they would be engaged in it: it would only be good business.

We now are in a sit­u­a­tion in our coun­try where what is being touted as truth has become per­verse: not rais­ing taxes is caus­ing there to be less invest­ment in the econ­omy and there­fore fewer jobs that are being cre­ated. Why add 1000 new jobs when adding those jobs MAY not reward you any more than the cur­rent tax struc­ture rewards you?

If I could be redun­dant to make a point: Busi­nesses are no longer in the busi­ness of busi­ness, they are in the busi­ness of mak­ing and keep­ing prof­its. I would argue that this is the only point for many busi­nesses: and do you blame them? At the end of the day we all want to make and keep our money. So until the cost of hold­ing prof­its becomes greater than the cost of invest­ing prof­its, we won’t see the job cre­ation that many law­mak­ers claim come with lower taxes. (For the eco­nomic astute, could it be that we have inverted the Laf­fer curve where taxes are so low that job cre­ation is stifled?)

Cor­po­rate wel­fare in the form of tax sub­si­dies and crip­plingly low taxes has done to cor­po­ra­tions what many believed would hap­pen with wel­fare to the cit­i­zens: it has made them lazy and has not given them any rea­son to go out and cre­ate jobs. Don’t mis­con­strue any­thing I am say­ing to think I am claim­ing these busi­nesses are evil. They are not. Most of us would do the same exact thing in their sit­u­a­tions. They are sim­ply engag­ing in good busi­ness prac­tices. These prac­tices cur­rently are not help­ing the econ­omy to grow.  Now, we need our polit­i­cal lead­ers to do their job and help our econ­omy grow by encour­ag­ing these busi­nesses to invest in themselves.

 

 

Posted in: America

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This article has 3 comments

  1. kevin Coakley 07/13/2011, 8:40 pm:

    Thanks for con­sid­er­ing me one of your cohorts. Lol I agree with you on busi­ness and their pur­pose. Henry Ford, who I hate to agree with, dur­ing the last great depres­sion tried to con­vince a group of indus­tri­al­ists that by hir­ing more work­ers in every level of the econ­omy and giv­ing every­one pay raises equally across all occu­pa­tions the econ­omy would self-start. His logic was a depres­sion is 90% emo­tion; I do not buy a car because I am afraid I will lose my sav­ings in the stock mar­ket. The auto man­u­fac­turer in turns sees profit drops so stops hir­ing and expand­ing. Since there is no expan­sion the build­ing con­trac­tor lays off work­ers. These work­ers go on unem­ploy­ment and the media reports it. This scares me into pulling my money out of stocks caus­ing prices to fall. The prin­ci­ple is sim­ple if you con­vince the pub­lic that they can take care of their fam­i­lies and buy a treat once and awhile the econ­omy will grow and prof­its will be made.
    If busi­ness is in the busi­ness of mak­ing money then gov­ern­ment should be in the busi­ness of pro­tect­ing the peo­ple not busi­ness or their power. Our cur­rent prob­lem is that both par­ties are inter­ested in caus­ing the other to loose, not in them­selves win­ning but in mak­ing the other guys look bad. Our credit rat­ing is an arti­fi­cial judg­ment made by the very bankers and invest­ment houses we had to bail out a year ago because they were too big to fail. Does any­one really think our coun­tries credit rat­ing works just like our own? Is the IMF or China going to send Vin­nie and Jose with a tow truck and repo the Statute of Lib­erty? If a busi­ness is too big to fail the USA cer­tainly is and in low­er­ing, its credit rat­ing will cause world­wide prob­lems to worsen and Stan­dard & Poor’s, Gold­man Sachs, etc to lose money. Since they want to make money, they have lit­tle incen­tive to lower their arti­fi­cial rat­ing. This is a world­wide prob­lem and will only be resolved by inter­na­tional action and inclu­sion of all coun­tries meet­ing and decid­ing we all need a do over like the banks.
    I now return you to your daily insain­ity, Ben go play with your baby and give your poor wife a break.

  2. Kevin 07/13/2011, 10:14 pm:

    Thanks for con­sid­er­ing me one of your cohorts. Lol I agree with you on busi­ness and their pur­pose. Henry Ford, who I hate to agree with, dur­ing the last great depres­sion tried to con­vince a group of indus­tri­al­ists that by hir­ing more work­ers in every level of the econ­omy and giv­ing every­one pay raises equally across all occu­pa­tions the econ­omy would self-start. His logic was a depres­sion is 90% emo­tion; I do not buy a car because I am afraid I will lose my sav­ings in the stock mar­ket. The auto man­u­fac­turer in turns sees profit drops so stops hir­ing and expand­ing. Since there is no expan­sion the build­ing con­trac­tor lays off work­ers. These work­ers go on unem­ploy­ment and the media reports it. This scares me into pulling my money out of stocks caus­ing prices to fall. The prin­ci­ple is sim­ple if you con­vince the pub­lic that they can take care of their fam­i­lies and buy a treat once and awhile the econ­omy will grow and prof­its will be made.
    If busi­ness is in the busi­ness of mak­ing money then gov­ern­ment should be in the busi­ness of pro­tect­ing the peo­ple not busi­ness or their power. Our cur­rent prob­lem is that both par­ties are inter­ested in caus­ing the other to loose, not in them­selves win­ning but in mak­ing the other guys look bad. Our credit rat­ing is an arti­fi­cial judg­ment made by the very bankers and invest­ment houses we had to bail out a year ago because they were too big to fail. Does any­one really think our coun­tries credit rat­ing works just like our own? Is the IMF or China going to send Vin­nie and Jose with a tow truck and repo the Statute of Lib­erty? If a busi­ness is too big to fail the USA cer­tainly is and in low­er­ing, its credit rat­ing will cause world­wide prob­lems to worsen and Stan­dard & Poor’s, Gold­man Sachs, etc to lose money. Since they want to make money, they have lit­tle incen­tive to lower their arti­fi­cial rat­ing. This is a world­wide prob­lem and will only be resolved by inter­na­tional action and inclu­sion of all coun­tries meet­ing and decid­ing we all need a do over like the banks.

  3. david 07/14/2011, 12:18 am:

    Well, I’d agree with the sit­u­a­tion involv­ing GE. Given our cur­rent tax sys­tem it is com­pletely incom­pre­hen­si­ble for wealthy indi­vid­u­als and big busi­nesses to do any invest­ing or hir­ing. We have the low­est adjusted tax rate in the last 50 years, and a gov­ern­ment where the GOP has out­right said that their goal is to deny Obama re-election. Since this is the case, it is impos­si­ble for any­thing to hap­pen that would ben­e­fit the econ­omy, or help the mid­dle classes.

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