The Coming Choice
We will be treated this year to a stark contrast in visions for America. That contrast cannot be made clearer than by considering a pair of tax proposals before Congress this week.
Republicans in the Senate blocked consideration of a Democratic proposal known as the Buffett Rule, which would have codified a clearer progressive income tax, and would have resulted in an estimated $36.7 billion per year in additional federal revenue. (Correction: the estimated $35 — $47 billion is for a ten-year period.) Virtually simultaneously with that act, Republicans in the House announced a new tax cut proposal, which would increase the deficit by almost exactly the same amount as the Buffett Rule would have reduced it. (Correction: the Republican proposal would increase the deficit by about $40 billion in a single year.)
That’s right…after spending three years whining about the deficit, the Republican reject a bill that would have made at least a token move in the right direction, and recommend instead an increase in the deficit.
Why would they engage in such blatant self-contradiction? The reason is simple. The Buffett Rule would have raised taxes on wealthy people. The Republican proposal would lower taxes on wealthy people. It’s really that straightforward.
It’s been obvious for a while where the interests of the Republican Party truly lie. On October 20, 2000, while running for President, George W. Bush gave a speech at the annual Al Smith Dinner for charity. As part of his remarks, he said, “This is an impressive crowd — the haves and the have-mores. Some people call you the élite; I call you my base.” It was meant to be a joke, of course. But the callousness of the humor is part of a pattern.
While running for president in 2008, John McCain couldn’t recall how many houses he owns. Mitt Romney has made one such élitist gaffe after another. But it’s not just about the arrogant personal attitudes of Republican standard-bearers and their inability to connect to the average American. Those are just symptoms of a deeper problem. For many years, Republicans have been engaged in what can only be called all-out class warfare.
It isn’t exactly news that income disparity in America is nearing an all-time high, eerily similar to the disaster year of 1928. What is amazing, however, is the unbridled eagerness with which Republicans are seeking to increase that disparity.
Take this week as a case in point. The proposed Buffett Rule would have ensured that Americans with annual income over $1,000,000 would pay a minimum marginal tax rate of 30 percent. The competing Republican tax plan in the House, specifically proposed as an alternative, would give a one-year 20 percent tax reduction to “small businesses” with fewer than 500 employees. This includes most professional sports teams, thousands of millionaire stock traders, and Paris Hilton, all of whom are “small businesses.” In fact, roughly 49 percent of the proposed $35-billion-plus tax giveaway would go to millionaires.
It could be argued that, besides helping to enrich the wealthy, giving some of that money to actual “small businesses” would help create jobs. Republicans don’t have much credibility on that argument, after defeating nearly every aspect of the American Jobs Act. It would be possible to target actual small businesses for tax assistance — for example, by giving cuts to businesses with average salaries under $100,000 and total revenue under $10,000,000. The Republican plan doesn’t do that. It’s designed to provide a particular windfall to wealthy individuals who have incorporated, and to use “small business cuts” as a Trojan Horse in order to do it.
Republicans aren’t interested in creating jobs, or in improving the economy in any other way — at least, not before they make another round of electoral gains. We know this. John Boehner told us so.
In point of fact, simply reducing income taxes for small businesses tends to reduce investment. How can this be? Because income taxes are assessed after businesses expenses (including employee salaries) have been paid. Income taxes are assessed on money that isn’t reinvested in the business. By reducing corporate income taxes for small businesses, we encourage business owners to take money as profit rather than using it, for example, to hire more people. It discourages investment.
Is this what the Republicans wish to have happen, or is it a case of unintended consequences? There is a pattern of where wealth has been going for the last three or four decades, particularly over the last quarter century. Recent Republican proposals would increase the wealth gap even more.
The Ryan Tax Plan — the plan that Romney called “marvelous” — would eliminate the security of Medicare, slash Pell grants, maintain $40 billion in tax giveaways to oil companies, and give $3 trillion in additional tax cuts to the wealthy and to huge corporations. Would it at least balance the budget after all that? No, it wouldn’t:
The Tax Policy Center looked into the revenue loss associated with House Budget Chairman Paul Ryan’s plan to cut the tax code down to two rates of 10 percent and 25 percent. They estimate the changes would raise $31.1 trillion over 10 years, or 15.4 percent of GDP. That’s $10 trillion less than the tax code would raise if the Bush tax cuts were allowed to expire, and $4.6 trillion less than it would raise if all of the Bush tax cuts were extended.
It increases the gap between receipts and expenses by $4.6 trillion dollars more than keeping the disastrous Bush tax cuts in place.
If Republicans are uninterested in creating jobs, and don’t care about the deficit, what are they after?
It’s been mentioned several times already. They’re desperate to reduce taxes on the most wealthy, eager to eliminate our social contracts such as Medicare and Social Security, anxious to dismantle environmental protections, consumer protections, and assistance for college students. Romney wants to get rid of the Department of Housing and Urban Development. During the Republican presidential debates, the candidates tried to outbid each other in listing federal departments they would eliminate, from the EPA to the Department of Education.
House Republicans even want to cut food stamps for America’s most needy, in order to avoid the cuts they agreed to last year in the Pentagon’s budget — cuts that resulted from their refusal to pay for the spending they wanted.
Observe the pattern — cutting programs that benefit average Americans or the poor, while insisting on tax cuts that benefit the wealthy. Their programs and proposals would maintain immense deficits and use those deficits as an excuse to slash programs that help 90 percent of Americans, while yet again cutting taxes on the wealthy. All this, while the wealth and income gap soars to historic levels.
I’ve concentrated here on economic issues. But there are social issues involved as well, and the pattern continues, an élitist pattern of restricting the many while benefiting the few — restricting access to health care, restricting the right to vote, restricting the right to marry, restricting the right to collective bargaining.
There is class warfare going on in America. In November, we’ll be presented with a very clear choice. The good and hopeful thing about America is that We the People are self-governing. We do not have to surrender our rights and our wealth to a privileged few. We certainly can do that if we want to. But it’s within our power to reverse the trend.
(I thank our reader GROG for bringing to my attention the matters indicated above as “Corrections”.)
Related articles
- Despite GOP Claims, Buffett Rule Would Only Affect 1 Percent Of Small Businesses (thinkprogress.org)
- ‘Buffett Rule’ Fails Procedural Vote in Senate (newsy.com)
- The math and politics behind the Buffett Rule (blogs.ajc.com)
- Seven U.S. Zip Codes That Prove A Need For The Buffett Rule (thinkprogress.org)

This entry was posted by dcpetterson on April 18, 2012 at 3:00 am, and is filed under Uncategorized. Follow any responses to this post through RSS 2.0.You can leave a response or trackback from your own site.
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Fascinating link, shortchain,
As the graph shows, both corporate tax receipts and net business investment as a percent of GDP declined over the period 1950 — 2008. The data does not show an inverse relationship between the two series. Rather, the data shows a substantial positive correlation, i.e., high values in the tax series are associated with high values in the private investment series, and the same association is observed for low values. This counters the idea that business investment increases when the tax burden decreases. Moreover, this decline in business investment suggests that by retaining more and more of their earnings, corporations are failing to make economically productive use of their capital .. and shortchanging growth.
This seems to be pretty conclusive. And it makes sense logically as well.
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The best way to take advantage of lower income taxes is to make as much freaking money as you possibly can while rates are low. And that’s achieved by growing your business and investing in it.
Except that you can’t take advantage of that lower income tax rate unless you take money out of the business.
And let’s say that you want your business to supply you with a profit of $100,000 / year after taxes. If the tax rate is higher, then your business has to make more money to supply you with that $100,000 after taxes. So if you have particular income goals, then a higher tax rate will encourage you to invest more in the business, to make it grow more, so that you can meet your income goals.
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#104 written by shortchain 1 year ago
We should point out that the most damaging situation for encouraging investment through taxes is to schedule a tax increase in the future, say, by having a tax decrease with a sunset clause. That pretty much guarantees that people will take everything they can out of their business income rather than re-investing before the sunset provision kicks in and makes it less attractive.
Hey, thanks loads, 2001 Republicans and Bush administration!
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shortchain,
Exactly right. To be fair, Bush and the Republicans wanted the tax cuts to be permanent. However, there was a lot of opposition to that, and the only way they could get these cuts enacted over a Democratic filibuster was through the Budget Reconciliation rule in the Senate — you know, the same provision that Republicans insisted was a violent totalitarian assault on our democracy when the Democrats used it to enact the ACA eight years later.
However, the arcane rules surrounding budget reconciliation required a sunset provision at ten years. Rather than drop the idea of a disastrous budget-busting tax cut (it led to at least a trillion in additional debt over the subsequent ten years) they allowed the sunset provision.
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#106 written by Armchair Warlord 1 year ago
GROG,
I reject your point. The argument being made against you can be demonstrated by simple recourse to economic theory, which can be cited adequately by any reputable economics textbook (presumably excluding the Austrian school, which is nothing more than a cargo cult anyways). At this point I can’t see how you’re not being deliberately obtuse by demanding repeated explanations from the other side rather than actually addressing their claims at the level at which they are being made, which is well above “you make as much freaking money as possible while taxes are low”.
And by the way, I still haven’t gotten a comment from you on the GOP’s sudden willingness to put their Grover Norquist tax pledges over the safety and security of the United States.
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#107 written by GROG 1 year ago
sc,
Even if you provide a link demonstrating, through statistical analysis, the truth of your assertion, he’ll simply ignore you or claim that your “authority” isn’t, er, “authoritative”.
I ignore the claim because, er, it doesn’t demonstrate the truth of DC’s assertion.
Blogger Jon’s graph shows corporate tax receipts as a percent of GDP. DC’s assertion relates to “business income tax rates”. Two different things. Did you find anything else on The Google? -
#108 written by GROG 1 year ago
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#109 written by GROG 1 year ago
AW,
The argument being made against you can be demonstrated by simple recourse to economic theory, which can be cited adequately by any reputable economics textbook
What economic theory? If that’s the case, it should be easy for you or anyone else to cite the textbook that teaches that low business income tax rates discourages investment.
And by the way, I still haven’t gotten a comment from you on the GOP’s sudden willingness to put their Grover Norquist tax pledges over the safety and security of the United States.
I reject any proposal to cut defense spending.
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#110 written by GROG 1 year ago
AW,
At this point I can’t see how you’re not being deliberately obtuse by demanding repeated explanations from the other side rather than actually addressing their claims at the level at which they are being made,
I’m not being deliberately obtuse. Too many times on this site when a claim is made, it is presented as being mainstream. Often times in reality, these claims are radical leftist ideas. If I c0unter these radical claims, they act shocked that anyone could possible disagree with them.
So this time I’m asking them to support, with evidence, the claim that DC’s assertion is mainstream. They’ve been unable to do it so far. When they can, or when they admit it’s not mainstream, I will be glad to engage in the conversation.
Until then I’ll wait so not to be accused of “dragging the conversation into the weeds”. -
#111 written by shortchain 1 year ago
GROG,
Utterly predictable. You pretend that corporate tax receipts, as a percent of GDP, do not closely correlate with the effective corporate tax rate. And here I thought, silly me, that you liked to measure things as a percent of GDP, because “it factors in inflation”.
I would humbly suggest that corporate tax receipts as a percent of GDP are about as good a single numerical measurement of the effective corporate tax rates as you are going to find, given the complexity of the US tax system and the way it has been gamed by corporations.
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#112 written by GROG 1 year ago
sc,
It’s not “corporate tax receipts as a percent of GDP” that changes corporate or small business owner’s behavior. It’s tax rates that changes behavior which ultimately determines effective rates.
Unless you’re going to argue that a business owner is going to look at corporte tax rates as a percent of GDP and say “Man, that’s low. I’m not going to invest in my company”. -
Grog,
Once again, I want to thank you for the conversation. You are always a valuable addition.
For myself personally, I don’t much care how many others agree with me on something. That doesn’t affect whether a thing is true or not. I don’t believe I ever said my ideas are “mainstream.”
I’m more interested in discussing the reasonableness of our contrasting economic understandings. Let me ask again. I’ve presented my reasoning a number of times in a number of different ways. Can you find anything to object to in my analysis?
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#114 written by shortchain 1 year ago
GROG,
I’m willing to bet heavy odds on the assertion that “corporate tax rates as a percent of GDP” are highly correlated with tax rates on small business owner. Care to take a bet on that?
Perhaps you’d like to be more precise about who the hell you are talking about. If you are talking about the corporate businesses, even smaller ones, then clearly the data I provided is dispositive. If you are talking about the businesses which are so small that they are under the control of a sole proprietor, then the ruling rate is the personal rate. What do you think the re-investment rate for that kind of business has been for the last ten years? (And you might ask how that would ever be found — it’s not like it’s readily available. Oh, and of course — we’ll have to make it as a percentage of GDP…)
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#115 written by GROG 1 year ago
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#116 written by Max 1 year ago
But proprietorships, partnerships and S-corps, are what make up the standard “small business” in 90% of the cases.
They have no “business tax” or corporate tax.
All their expenses; COGS, labor, rents, overhead, reinvestments, everything is untaxed.
The profit left over is what the owner(s) then take(s) out as personal income and is then taxed AS personal income, since it was not plowed back into the business, but is for the personal benefit of the owner. (Well, annual asset gain in S-corps is taxed as income, even if not cashed out, simply put.)
All of which is why the whole “small business, job creators tax increases discourage job creation” meme is so much bullshit. All those business expenses are pre-tax. -
I’ve been busy elsewhere today, so this is my first read of the site today.
shortchain, the article you supplied, while interesting, doesn’t support the argument that a lowered tax rate leads to lower investment. Nor, of course, does it refute the argument. It does show a correlation between net business investment and corporate taxes, both as a percent of GDP. It’s not a particularly surprising correlation, since GDP has grown faster than business investment…quite possibly because productivity per unit of labor has risen over that time.
GROG,
The best way to take advantage of lower income taxes is to make as much freaking money as you possibly can while rates are low.
I’d call that a waaaay oversimplistic description. But, moreover, as dcpetterson pointed out, the tax on money reinvested in the business is zero. As I noted before, it’s the same reason people invest in IRAs and 401ks. And a higher tax rate on money not reinvested in the business necessarily creates incentive to reinvest in the business. Why? Because it allows the business owner to take advantage of lower income taxes by making as much freaking money as they possibly can while rates are zero.
Incidentally, even in really good economic times, corporations are taxed at under 4% of gross income. During harder times, the rate drops below 2%. This is hardly an onerous rate. Of course, the nominal marginal rate is 15–35%, but that’s assessed on net income.
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#118 written by shortchain 1 year ago
Michael,
The two statements:doesn’t support the argument that a lowered tax rate leads to lower investment. … It does show a correlation between net business investment and corporate taxes, both as a percent of GDP.
– seems mutually contradictory. Or is it that the tossing in of a “net” here and there that makes them not not mutually contradictory?
Personally, I think most people here are, individually and collectively, arguing about largely separate and distinct factors and results. Typical of the kind of economic arguments where people don’t take care to carefully define the terms.
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GROG,
I’m asking them to support, with evidence, the claim that DC’s assertion is mainstream.
Part of the problem, to which mclever alluded earlier, is that the claim is sufficiently mainstream as to be rare to find as the subject of an article. The bulk of the articles that discuss it at all are of the “yeah, but” variety, written by anti-tax partisans (some of whom sound suspiciously like Intelligent Design arguers). But you can get a sense of the degree to which it’s a mainstream notion by the way it is treated in an almost offhand manner in this paper. I can assure you that it was discussed in my corporate finance classes (again, in an offhand “of course” sense), and I have it in my classroom handouts. But that’s not going to help out here.
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shortchain,
The two statements:
doesn’t support the argument that a lowered tax rate leads to lower investment. … It does show a correlation between net business investment and corporate taxes, both as a percent of GDP.
– seems mutually contradictory
Ahh, but they’re not. The first statement refers to a lowered tax rate. The article you pointed to said nothing of the tax rate; it merely pointed to taxes as a percent of GDP. They’re not the same thing, since the taxes aren’t assessed on GDP.
I think most people here are, individually and collectively, arguing about largely separate and distinct factors and results.
Yes. It’s one reason that, in situations such as these, I try to be as precise as possible in my arguments.
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GROG,
What do you mean by “leave your money in the business”?
What he means is that, for businesses that are not sole-proprietorship, the owner can choose to have net profits stay in the business’s bank accounts, rather than transferring the money to the owner’s personal bank accounts. In doing so, there is no personal income tax assessed on the net profits. If the owner wishes to avoid even the business income taxes, the money can instead be used to invest in growing the business (e.g., buying more capital equipment, adding to payroll, or a myriad of other options). At that point, those dollars remain untaxed entirely.
Things are different for sole proprietorships, since the money is commingled between the business and the owner. In that situation, there is no option to “leave the money in the business”, but there is still the option of capital investments to offset taxable income.
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Max,
But proprietorships, partnerships and S-corps, are what make up the standard “small business” in 90% of the cases.
Yes, depending on where one draws the line on “small business”.
The profit left over is what the owner(s) then take(s) out as personal income and is then taxed AS personal income, since it was not plowed back into the business, but is for the personal benefit of the owner. (Well, annual asset gain in S-corps is taxed as income, even if not cashed out, simply put.)
Yep.
All of which is why the whole “small business, job creators tax increases discourage job creation” meme is so much bullshit. All those business expenses are pre-tax.
Pretty much.
There is, however, a legitimate argument about relative tax rates in different countries, with respect to the behavior of larger businesses. But that’s not a particularly popular topic among voters.
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Grog asked,
What do you mean by “leave your money in the business”?
I think Max and Michael both explained it well. Basically, by “leave your money in the business” I mean pretty much the same thing that Republicans mean by “investment” or “job creators.”
That is, if you pay someone’s salary, or if you buy a bunch of raw materials, or if you pay the electric bill so your employees can do more work — all of that has the potential of bringing in more money to your business (that makes it “investing in the business” or “leaving the money in the business”) and none of it is taxed. Income taxes are assessed on the money that isn’t used for these sorts of purposes, but which, instead, goes into the owner’s pocket — or sits in a bank account for the company to spend at some later date.
A business takes in money. YOu as a business owner can do two basic things with the money. You can put it in your pocket and call it “profit”, or you can use it to run more of the business — pay more salaries, hire more people, buy more raw materials, purchase advertizing, and so on. If you put the money in your pocket, it is subject to income tax, and you lose some of it. If you put the money back into the business, it is subject to zero income tax.
If that money is used to grow the business, or to pay the operating expense of the business, then it isn’t taxed as income (there’s some stuff with depreciation of equipment purchases, but that’s peripheral to the basic principle). If the tax on not doing this is higher (that is, if the income tax rates go up) then there is an incentive to use the money to build the business, rather than to pay higher taxes on it. If the income tax rate goes down, then there is incentive to use that money as profit instead of investing it in the business.
It’s very simple. If the cost of putting the money into your pocket goes down (that is, if income tax rates go down) you’re likely to put more of the money into your pocket, instead of using it to pay more people to make more widgets. Conversely, if the income tax rates go up, then the cost of putting the money into your pocket has increased. Since you pay zero income tax on the money that makes your business grow (that is, the money that goes to your employees and raw materials and so on), raising income taxes tends to incentivize small business growth.
Can you dispute any of these principles? Can you find an economics course that would not teach this as a truism?
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Michael (and Grog too),
I think the value of the article shortchain linked, and the graph in that article, is not that it provides evidence about the effect of increasing (or decreasing) tax rates. (It doesn’t.) What it does do is show there is no correlation between decreased corporate taxes and increased business investment. In fact it works the other way. As corporate taxes go down (as a percent of GDP), so does corporate investment.
Neither the article nor the graph implies anything about cause. What it does do is this:
Republicans like to insist that if you tax businesses less, they will invest more. That is, if you tax businesses less, they will create more jobs and make the nation wealthier. The article and the graph clearly show this is not true.
Let me repeat. The Republican meme on this is not true.
There is absolutely no correlation between lower corporate taxes and increased investment. In fact, it works the other way — there is a definite correlation between lower business taxes and lower investment.
Causation is not the issue. Tax rates are not the issue. What is at issue here is the meme that we should not tax the “job creators,” or that lower taxes means greater investment. These Republicans memes are lies.
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#125 written by Max 1 year ago
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#126 written by PWS 1 year ago
DC elatus
If the cost of putting the money into your pocket goes down (that is, if income tax rates go down) you’re likely to put more of the money into your pocket, instead of using it to pay more people to make more widgets. Conversely, if the income tax rates go up, then the cost of putting the money into your pocket has increased. Since you pay zero income tax on the money that makes your business grow (that is, the money that goes to your employees and raw materials and so on), raising income taxes tends to
This certainly is an interesting theory, and runs counter to every economic argument I’ve ever read.
Where did you say you studied economics? I’d be interested to check out the syllabus.
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#128 written by PWS 1 year ago
Max:
I have owned several sole proprietorships and participated in a couple S-corps and NEVER, in ANY of them, did my income tax rate play ANY part in the decision making process to start-up or enlarge ANY of those businesses.
Thank you, I think that’s pretty much spot-on. And at any rate, except for the effects on multinationals, we’re nowhere near the tax rates that would have a strong effect, whatever the Laffer-curve enthusiasts say.
But I have to apologize to DC. Very high tax rates DO encourage tax-shelter investments, which are usually designed to accelerate deductions into the current period and postpone income. Generally these either cause substantial actual economic losses, or as the income rolls in (never actual cash, only bookkeeping entries), subject investors to taxes on income for which they haven’t received any money. Not the best business investments .
Here’s a link to a paper by Peter Diamond and Emmanuel Saez arguing that the top tax rate, the rate the generates the most revenue, could be much higher than it is today, on the order of 70%. Look at the formula on the top of page six, which depends only on the income distribution at the top (which is a Pareto distribution), and the elasticity of labor supply vs tax rates. The first is pretty easy to determine, the latter is fairly well establish in the range of .4 to .5 . If you want a more detailed discussion I have the original NBER paper and I can send it to Michael to post on the site.And yes, Grog, this is a peer reviewed paper, and these guys are extremely well respected economists. So no wingeing from you about that.
Saez and Diamond derive the simplest equation without considering the social utility of the loss of disposable income to higher-income people. The original, more detailed paper, takes this into account and comes up with optimal top tax rates lower than 70%, but still substantially higher than the current rates.
I don’t think tax rates should be that high, as a matter of fairness. But there’s certainly a lot of room to raise them without ANY undue consequences, whatever howls we hear from the jackals on the right.
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#129 written by PWS 1 year ago
DC elatus
Nice flatus. Care to dispute the logic? If this truly is counter to “every” economic argument you’ve read, then you need to stop reading FOX “News”.
WOOOOOO. I can see my epithet for you is well deserved. I’ll respond tomorrow or Monday.
And I only listen to Fox news when I want to get my heart rate up at the gym .
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PWS, Thanks.
I know that most small business owners don’t give a damn about income tax rates. My point is to dispute the Republican talking point that lower taxes equals more small business investment. I think we’re agreed that this is nonsense. You might stress more strongly than I do that the income tax rate has no effect whatever on small business investment, or that it would only at extremes. That’s cool. If that’s your point, we have no problem (at least, I have no dispute with you, though I would encourage you to make the point that income tax rates are irrelevant to small businesses, because that undermines Republican talking points just as well).
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#132 written by PWS 1 year ago
Michael: Re #121
What he means is that, for businesses that are not sole-proprietorship, the owner can choose to have net profits stay in the business’s bank accounts, rather than transferring the money to the owner’s personal bank accounts. In doing so, there is no personal income tax assessed on the net profits. If the owner wishes to avoid even the business income taxes, the money can instead be used to invest in growing the business (e.g., buying more capital equipment, adding to payroll, or a myriad of other options). At that point, those dollars remain untaxed entirely.
If this is a sole proprietorship or a partnership, profits are taxed at individual rates.
If this is a sub-S corporation it’s taxed at the individual rates whether or not the owner distributes the profits.If this is a sub-C corporation it’s taxed at corporate rates, which are generally somewhat higher than individual rates. So to say ‘if the owner wishes to avoid even the corporate taxes’ is misleading.
If this is a sub-C corporation and the management distributes the profits as dividends, they are also taxed at the dividend rate, which is either 5% or 15%.
I think the implication that business owners ‘invest in the business’ — i.e. spend money on deductible expenses — solely in order to avoid taxes can’t be correct. If they’re sane, they spend money in order to make a future profit. Businesses can accelerate expenses and defer income (e.g. tax shelters see above) , or they can structure the expenses so they appear to fall under some preferred tax treatment, but overall businesses invest not to save on taxes but to make profits.
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#133 written by PWS 1 year ago
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#134 written by Armchair Warlord 1 year ago
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#137 written by GROG 1 year ago
Michael,
What he means is that, for businesses that are not sole-proprietorship, the owner can choose to have net profits stay in the business’s bank accounts, rather than transferring the money to the owner’s personal bank accounts. In doing so, there is no personal income tax assessed on the net profits.
This is why I asked DC the question.
For S Corps, for example, profit is income to the shareholders and is to be reported on their personal income tax returns. Money does not have to be “transferred to the owner’s personal bank account” for taxes to be assessed. S Corps are pass through entities and profits are taxed at the personal tax level whether they are distributed or not. Pretty basic. -
#138 written by GROG 1 year ago
Max,
I have owned several sole proprietorships and participated in a couple S-corps and NEVER, in ANY of them, did my income tax rate play ANY part in the decision making process to start-up or enlarge ANY of those businesses.
OK, but the claim being discussed is that low business income tax rates discourages investment. You admit that your income tax rate never played any part in the decision making process to invest in your company. That seems counter to DC and Michael’s argument that tax rates do play a part in business owner’s decision making process regarding investing in their company.
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#139 written by GROG 1 year ago
Max,
The profit left over is what the owner(s) then take(s) out as personal income is then taxed AS personal income, since it was not plowed back into the business, but is for the personal benefit of the owner.
Again, I’m not sure what you mean by “take out as personal income”. The money “taken out as personal income” is in the form of a salary that is taxed on a W-2. Any “profit” taken out as personal income and used “for the personal benefit of the owner”, would have to be in the form of a distribution. Taxes are still assessed on profits whether or not a partner takes a distributiion on the profits.
All of which is why the whole “small business, job creators tax increases discourage job creation” meme is so much bullshit. All those business expenses are pre-tax.
Any sane person who owns a for-profit business (at least in a capitalistic economy) is going to try to make as much profit as he or she possibly can, period. That’s pretty simple.
I do everything I can to increase my profits every year by investing in my company by doing things like buying new equipment or hiring more people in order to grow my business. This idea that a low tax rate is going to discourage me from making more of a profit is absurd.
PWS hit the nail on the head with this:If they’re sane, they spend money in order to make a future profit. Businesses can accelerate expenses and defer income (e.g. tax shelters see above) , or they can structure the expenses so they appear to fall under some preferred tax treatment, but overall businesses invest not to save on taxes but to make profits.
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#140 written by Max 1 year ago
GROG,
Again, I’m not sure what you mean by “take out as personal income”. The money “taken out as personal income” is in the form of a salary that is taxed on a W-2. Any “profit” taken out as personal income and used “for the personal benefit of the owner”, would have to be in the form of a distribution. Taxes are still assessed on profits whether or not a partner takes a distributiion on the profits.
Perhaps you confuse yourself by making more out of something than is there. #116 is pretty self-explanatory. Especially if one sat through, without napping, even a general Econ 101 class.
But for you: “taking out as personal income”. Because I listed the 3 predominate forms of “small business job creators” together(you remember, the ones the GOP keeps complaining that raising taxes on will stifle “job creation”), that phrase was to include participants in S-corps. One should know that sole proprietors don’t even have to keep separate bank accounts for business and personal use. Actually neither are partners required to do so. All they have to have is some sort of percentage share agreement. Any “profit”, defined as any money available after all business expenses have been paid, is, by tax law, “personal income”.
In an S-corp, the difference is that money may be left in the corporation, or it may be drawn out, but any capital gain in asset value is reported on a K-1 form, divided as per the partnership agreement, and taxed as personal income. Since this IS a corporation type, a separate bank account is a must.
“Any “profit” taken out . . .” Huh? There is no “must” here!!! You don’t take a salary as a proprietor or a partner, so no W-2 is required. You may take a “draw” any time. You may well put some or all of that draw back anytime during the year. Only the profit at the end of the year that one kept is taxed. If it’s an S-corp, one or more partners (an S-corp may also be an individual) MAY be paid a salary. That salary is a business expense and would be a debit against a gain in asset value when the K-1’s are prepared. BUT, the salary, or salaries, WOULD be personal income for the person and taxed as such, along with their asset gain as reported on the K-1.
“Taxes are still assessed on . . .” This is ONLY true for these S-corps.
Hope this helps.
Yes, I know about “business income tax rates …”, but that whole argument is a narrow definition of the bigger taxing issue, and, IN FACT, is NOT the argument made by the GOP when talking about “job creators”.
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#142 written by GROG 1 year ago
Max,
Try to keep cool and calm down a little bit.
You and Michael are trying to make a claim that profits of an S Corp are not taxed unless they “take the money out as personal income”. That’s not true. The shareholer of an S Corp can be taxed on income they never receive. This can be learned by sitting through, without napping, a basic Econ 101 class.
Now, in regards to my comments in #138, “You admit that your income tax rate never played any part in the decision making process to invest in your company”.
Do you or don’t you agree with DC’s and Michael’s claim that tax rates do play a part in the decision making process to invest in one’s company? -
#143 written by Max 1 year ago
I love it when the first thing a right winger who is getting his hat handed to him does is to accuse his opponent of getting all hyper! “Take a breath” “Calm down”“
Too funny. But just look how often it happens.
You and Michael are trying to make a claim that profits of an S Corp are not taxed unless they “take the money out as personal income”. That’s not true. The shareholer(sic) of an S Corp can be taxed on income they never receive.
Perhaps, GROG, if you took less time trying to be inane and actually reading you would know neither I nor Michael ever said that about S-Corp shareholders. In fact I stated and reiterated that the opposite was true. (#116 and #140 ¶¶3 & 4)All in your imagination as you try to deflect from the truth.
Y’all have fun. Back later.
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#144 written by GROG 1 year ago
Max,
Interesting that you can’t bring yourself to respond to DC’s andMichael’s claim that tax rates play a part in the decision making of business owners.
Max said in #116:The profit left over is what the owner(s) then take(s) out as personal income and is then taxed AS personal income, since it was not plowed back into the business, but is for the personal benefit of the owner.
The “profit left over” will be taxed whether or not the owners take anything out as personal income to be used for the “personal benefit of the owner”.
And Michael said:What he means is that, for businesses that are not sole-proprietorship, the owner can choose to have net profits stay in the business’s bank accounts, rather than transferring the money to the owner’s personal bank accounts. In doing so, there is no personal income tax assessed on the net profits.
(The empasis is mine.) For S-Corps and LLC’s, that is simply not true. Income taxes will be assessed on net profits even if the net profits stay in the businesse’s bank account. That’s why shareholders can be taxed on income they never receive.
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Interesting that you can’t bring yourself to respond to DC’s andMichael’s claim that tax rates play a part in the decision making of business owners.
So, Grog, are you claiming that tax rates don’t play any part in the decisionmaking of “small business” owners? Are you telling us that the Republican plan to cut income taxes for “small businesses” is a farce? Are you willing to take the next step and agree that Republican bleating about how we shouldn’t tax “job creators” is so much nonsense?
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GROG,
No, it’s not true for S-Corps or LLCs. I overgeneralized, but really that’s not germane to the point I’ve been trying to make anyway.To illustrate the point, I’m going to apply some math, with purely hypothetical numbers.
Let’s start by assuming that a business’s profits are taxed at a flat 50%, and the business just earned $1M. The business has two main choices of what to do with that money:
1) Pay the government $500k and put the rest somewhere else (say, invest in an ETF).
2) Take the whole $1M and spend it on deductible activities.In the first scenario, let’s say that the business can expect a 5% return on the ETF. That would be $25k in additional money over the following year. If the business were to spend on deductible activities (maybe buying some sort of equipment), the expected return would need to be 2.5% in order to generate the same $25k. So let’s say the equipment generates a 3% return ($30k). It makes sense for the business to buy the equipment, rather than investing in the ETF.
Now, let’s say that the business’s profits are instead taxed at a flat 25%.
In the first scenario, since the government took only $250k, there’s $750k to invest in the ETF. At 5%, that generates $37,500. This means that the business is better off with the ETF than buying the equipment that was going to generate $30k.
The lower tax rate discouraged the investment in the business.
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#148 written by GROG 1 year ago
Michael,
This means that the business is better off with the ETF than buying the equipment that was going to generate $30k.
No, it doesn’t mean that at all. Investing in one’s own company in order to do things like improve efficiency, or purhcase new equipment, or increase inventory, or increase wahehosue space is vital to the long term success and survival of the company. Investing in ETF’s is not.
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#149 written by Armchair Warlord 1 year ago
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GROG,
No, it doesn’t mean that at all.
Absolutely it does. Especially for those who want to make as much freaking money as possible (those were your words, weren’t they?).
Investing in one’s own company in order to do things like improve efficiency, or purhcase new equipment, or increase inventory, or increase wahehosue space is vital to the long term success and survival of the company.
Not necessarily. If your ROI is lower by improving efficiency, or increasing inventory, or increasing warehouse space, than by investing in the ETF, then the company’s success better assured by putting the money into the ETF. History is littered with piles of corpses of companies that chose to expand rather than invest wisely.
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Investing in one’s own company in order to do things like improve efficiency, or purhcase new equipment, or increase inventory, or increase wahehosue space is vital to the long term success and survival of the company.
In that case, the income tax rate is completely irrelevant to the heath or survival of a company, because income taxes are assessed on money that isn’t used for investing in the business. And therefore the Republican opposition to raising taxes on “job creators” is an intentional farce. Right? Are we agreed on that? Raising the top marginal tax rate on individuals or on businesses (unless maybe if you get near 100%) is not going to have a negative effect on job growth or business expansion, right?
We are agreed on that much, yes?
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#152 written by GROG 1 year ago
Especially for those who want to make as much freaking money as possible (those were your words, weren’t they?).
Yes, those were my words. If a company decides that expanding by investing in itself is going to make them as much freaking money as possible, then that’s exactly what they’re going to do, regardless of how low their tax rates are.
History is littered with piles of corpses of companies that chose to expand rather than invest wisely.
And history is littered with piles of corpses of companies who chose to invest rather than expand wisely.
A company who expanded unwisely and died as a result of it, died because they expanded unwisely. They shouldn’t have expanded unwisely. It was a bad business decision.
That’s different from a company being discouraged from expanding because of low tax rates. -
#153 written by GROG 1 year ago
DC,
For now, I’d like to deal with your and Michael’s assertion that low tax rates discourage business owners from investing in their companies.
AW,Since when, exactly, has corporate America been interested in long-term success?
As DC has pointed out, this discussion has revolved around small businesses — S Corps, LLC’s, partnerships and the like. Most of them have been interested in long term success for quite some time now.
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#154 written by Max 1 year ago
GROG,
Interesting that you can’t bring yourself to respond to DC’s andMichael’s claim
That’s pretty damned disingenuous, not to mention downright cowardly, of you to even MENTION such, as YOU have been AVOIDING for DAYS, admitting to the fact that Reagan used increased federal spending and trebled the National Debt to help drive the economy in the ’80’s. And that, in fact, that spending most likely played a larger role in driving the economy than did the ERTA in ’81. I gave the numbers. You countered with NOTHING!
Frankly, I give not the slightest damn about the debate over Michael’s and dc’s “claim. Enough evidence has been given for which you have NO COUNTER to have you under the doormat on the issue.
When you want to play by the same rules, let me know. Cause I can beat you like a rented red-headed mule for those omissions and all your serious lapses in protocol.
Of course, you’ll probably act all offended and like you got hurt feelings when I do, instead of manning up and playing the same game you want others to.
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#155 written by shortchain 1 year ago
GROG,
You say:And history is littered with piles of corpses of companies who chose to invest rather than expand wisely.
Name one. I’m betting it wasn’t the investment, per se, but rather the fact that the investment was unwise. It’s always going to be a case that any wise choice, whether to invest or to expand, is going to likely be better than a stupid and thoughtless choice to do one or the other.
Which just illustrates the futility of this particular argument. There are obviously going to be times and places where taking income out of a business and investing it (wisely, of course) is going to pay dividends down the road with a better ROI than plowing it thoughtlessly back into a failing business. And times and places when it is wiser to expand than to take profits.
I would suggest, based on personal experience, that a lower tax rate on profits encourages profit-taking. The truth of that statement doesn’t need any deep analysis, but do carry on insisting on it. I’ll come back later and see what happens. Got work to do now.
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#156 written by GROG 1 year ago
sc,
I would suggest, based on personal experience, that a lower tax rate on profits encourages profit-taking.
The mistake you’re making is assuming that businesses won’t invest more money into their business to make an even larger profit to take advantage of low tax rates. Sane business owners don’t just snatch up all their profits because tax rates are low. They are incented to make even more profit.
If tax rates on profit are low, you can damn well be assured that I will do whatever necessary to make an even larger profit this year and next year and the year after that. -
#157 written by GROG 1 year ago
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#158 written by shortchain 1 year ago
GROG,
So you are claiming that, if, as seems likely, taxes will go up in a couple of years, you will blithely plow profits you could take today into your company, without regard for the possible return?
Let me point out that a lot of financial managers would advise you not to do that. What they’ll tell you to do is to calculate the future value of your investments. If it makes more profits at some future time (and you are willing to wait) then it makes sense to plow it back in. But if not — and higher future taxes would be a reason not to wait — then you’d be stupid to wait. And then there’s the sad fact that a lot of people prefer to take a trip to Cancun today than to wait twenty years and take 10 of them that year.
Really, this is so obvious that it’s really hard to understand how you can avoid seeing it.
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#159 written by GROG 1 year ago
sc,
So you are claiming that, if, as seems likely, taxes will go up in a couple of years, you will blithely plow profits you could take today into your company, without regard for the possible return?
No. That’s ridiculous. If it is not prudent to put money back into my business to expand, I wouldn’t do it.
That in no way means that low tax rates discourages me from expanding. Other things certainly do. Low tax rates is not one of them.
Since you’re so in tune with financial managers, can give me the name of one who would discourage a client from expanding their business because tax rates are low? -
#160 written by shortchain 1 year ago
GROG,
If you don’t take tax rates into your equation for taking profits out of your company, you are a fool. You speak as if putting money into one company or your pocket is the only choice. That is a false dichotomy. The truth is more complex, and it means that, when tax rates on personal income are low, there is a greater incentive to take money as profit rather than re-invest it in the company. Just as, when tax rates on capital gains are low, and the stock market looks like it won’t go much higher, there is an incentive caused by the low tax rates to sell stock and take the capital gains.
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#161 written by shortchain 1 year ago
GROG,
It has not escaped my attention that Michael and PWS both gave you links which you have simply ignored. It has not escaped my attention that I asked for the name of a company that invested rather than expanded and failed as a result — and got ignored. So don’t bother asking me for the name of a financial manager who would advise you to take into account your future tax situation. Being near retirement, I can tell you that Fidelity, TDAmeritrade, you name the company, and they’ll tell you the same thing. TAKE YOUR FUTURE TAX SITUATION INTO ACCOUNT WHEN PLANNING WHETHER TO TAKE PROFITS NOW OR DEFER THEM.
No financial manager is ever going to give you cut-and-dried generic advice, such as “don’t expand, take profits”. But they’re going to absolutely tell you to consider it. That’s the way they roll.
Now, I’m sensing that this little discussion has reached the point where it could get acrimonious, and I really don’t feel like that today, so you have a good evening.
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GROG,
And history is littered with piles of corpses of companies who chose to invest rather than expand wisely.
Precisely. And how does a successful business make the determination? Those who make the decisions base them upon the expected return on the investment. That’s why I gave specific numbers, so as to illustrate exactly how a change in tax policy can change the relative returns of the two options presented.
While my example was (deliberately) oversimplified, it’s the foundation of all good business decisions.
Your counter to my scenario was to claim, in essence, that the scenario I described couldn’t happen. But it does happen, and quite often.
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GROG,
That in no way means that low tax rates discourages me from expanding. Other things certainly do. Low tax rates is not one of them.
So you’d prefer to make less money through expanding your business than to make more money through not expanding? Doesn’t seem to match your earlier statements.
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If it is not prudent to put money back into my business to expand, I wouldn’t do it.
Precisely.
And if the cost of taking the money out of the business is low enough (for example, because of low income taxes), then it’s not “prudent” to “put money back into your business.”
Thank you for agreeing with me, and for reiterating the point I’ve been making.
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#166 written by Armchair Warlord 1 year ago
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#167 written by GROG 1 year ago
sc,
It has not escaped my attention that Michael and PWS both gave you links which you have simply ignored.
I read both links. Please feel free to provide the quotes where those articles indicate that low business income tax rates discourage investment.
And I’m not buying this notion that it’s such an obvious belief that you’re not going to find anything written on it.TAKE YOUR FUTURE TAX SITUATION INTO ACCOUNT WHEN PLANNING WHETHER TO TAKE PROFITS NOW OR DEFER THEM.
So tax rates do play a part in a business owners decision making process when it comes to expanding his business? Interesting.
Max said earlier:I have owned several sole proprietorships and participated in a couple S-corps and NEVER, in ANY of them, did my income tax rate play ANY part in the decision making process to start-up or enlarge ANY of those businesses.
Hey Max, shortchain called you a fool.
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#168 written by GROG 1 year ago
AW,
This is the country that ran negative savings rates for a generation. I’m afraid your logic doesn’t work when applied to small businesses either.
For a sophist you’re awfully bad at making arguments that don’t have obvious rebuttals.So your “obvious rebuttal” is that low business income tax rates discourage investment because small businesses aren’t interested in long term success because they ran negative savings rates for a generation?
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#169 written by GROG 1 year ago
DC,
And if the cost of taking the money out of the business is low enough (for example, because of low income taxes), then it’s not “prudent” to “put money back into your business.”
Thank you for agreeing with me, and for reiterating the point I’ve been making.And if the cost of taking moneyout of the business is low enough (for example because of low income taxes), then it may be “prudent“ to put more money back into your business in order to generate more profit to take advantage of low income tax rates.
If you have an investment that is generating high rates of return do you pull money out of that investment or “cash out”, or do you put more money into that investment? -
And if the cost of taking moneyout of the business is low enough (for example because of low income taxes), then it may be “prudent“ to put more money back into your business in order to generate more profit to take advantage of low income tax rates.
If you have an investment that is generating high rates of return do you pull money out of that investment or “cash out”, or do you put more money into that investment?That depends on many things — for example, can I gamble with that money in the stock market, and pay even lower taxes on the capital gains?
Another factor — how long to I intend to remain in business? Am I in my 50s, and would enjoy early retirement?
There are many factors involved in a business decision. The income tax rate is only one of those factors. The disincentive encourages people to take money out of the business, though it doesn’t guarantee they will do so. If those other factors are pretty much equal, this one might be enough to push someone in the direction of taking money out of the business.
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#171 written by shortchain 1 year ago
GROG,
I was speaking, obviously, of personal income. Max was speaking of corporations of various stripes. If you don’t know (or refuse to admit) the difference, then there’s no point in continuing the discussion.
I think you overestimate the utility of “argumentum ad ignorantiam”.
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#172 written by mclever 1 year ago
Taking the arguments of Michael, Max, DC, and shortchain together, it seems like they’re all agreeing that lower tax rates are an incentive to withdrawing money from a small business (i.e. un-reinvested profits of whatever sort), but that the impact is at the margins, because any decision to re-invest the money in the business is necessarily tax-free. They’re saying that if there’s an impact of lower taxes, it’s in the opposite direction of encouraging business reinvestment in the short-term, but they’re not saying that all businesses will stop investing in themselves just because taxes on profits are lower.
In any business decision, there is an element of balancing the risk vs. reward, and each person has different tolerances for the risk they’re willing to take. Lower risk people will be more inclined to take the money now, where higher risk people might gamble that the investment will pay off more than the tax benefit. I think Michael’s example in #147 with simplified numbers explained the sort of thought process fairly clearly. One modification might be to add a bit of variance, because no one knows for sure what the returns will be. Instead of just saying the ETF expected returns are 5%, we might say the expected returns have a range, perhaps 4%-6%. And likewise the equipment/salary/infrastructure re-investments have a different range. Depending on each person’s proclivities for pessimism, the business owner may choose to take the more certain 4–6% after tax vs. whatever the business projections are. Lower taxes tilt the equation slightly in favor of the post-tax option (i.e. take the money now), especially if the businessman is feeling a bit pessimistic about the potential return on re-investing in growth of the business over the short-term. If it’s long-term, then maybe he takes the money out now, sticks it in the ETF for a while, and then re-invests in the business when the outlook is a little shinier.
Am I understanding all of you about right, guys? -
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By the way, that “short-term-sure-thing vs. long-term risk” is the reason most entrepreneurs say that income tax rates have little or no effect on their business decisions. Entrepreneurs genetically accept risks. They can’t help that, it’s what they do.
This is one of the biggest reasons the talking point about “we can’t tax job creators because it will slow job growth” is an absurd bit of partisan noise. Small business owners are going to do what they do regardless of the tax rates (unless you get to extremes of near 0% or near 100% — and maybe not even then).
Getting back to the point of this thread, the meat of my article — it’s a sign of the difference in philosophy. Democrats want to improve the economy. Republicans want to increase the wealth and income gap. The biggest effects that refusing to tax the “job creators” will have are 1) the immensely wealthy will pay even less in taxes, which means 2) there will be less meat inspections and road repairs and health care and all the other stuff a nation is supposed to do.
That’s the purpose of the “you can’t tax rich people” meme. It’s part of the continuing class war that Republicans are waging against the poor and middle income people.
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#175 written by dawolf 1 year ago
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#176 written by shortchain 1 year ago
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#178 written by GROG 1 year ago
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#179 written by dawolf 1 year ago
Seems so!
Speaking for myself, I’ve put basically my life savings into a company I’m running in my spare time (a wind energy company). We’ll see if it gets off the ground properly to make a return.
But you know what? I have no accurate idea of what tax I’ll pay on any profits (because it’s in the future, so it can’t be accurate). And it wouldn’t matter if it was 10% higher, or 10% lower: either I’ll lose the lot, or I’ll make a lot of money. One or the other, not really anything in between. So do I care about the tax rate right now? No.
So the tax rate hasn’t stopped me investing, and a bit of a difference wouldn’t matter much. -
#180 written by GROG 1 year ago
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#181 written by Max 1 year ago
GROG,
You have no shame. I have cautioned you against putting words into my mouth, I’ll leave it to sc to decide how he will take you to task for doing so to him.
Here’s EXACTLY what sc wrote in # 160:If you don’t take tax rates into your equation for taking profits out of your company, you are a fool.
Here’s EXACTLY what I wrote:
I have owned several sole proprietorships and participated in a couple S-corps and NEVER, in ANY of them, did my income tax rate play ANY part in the decision making process to start-up or enlarge ANY of those businesses.
(Both cases, emphasis mine) Nowhere did I mention taking profits. Zip. Nada, shortchain spoke STRICTLY about taking profits out. Specificly. And you are NOT stupid, so that cannot be a consideration.
Here’s EXACTLY what YOU wrote:
Hey Max, shortchain called you a fool.
GROG, you LIED. You put words in another’s mouth with the purpose of telling a LIE. No other way to look at it. No other conclusion to draw from it.
Shameful, malicious and SAD. Your apology to shortchain would be appropriate and is expected.
Correction, sc. I was not talking about various corporations. I was only talking about the form of business: proprietor, partner, S-corp shareholder, where each are generally small businesses and the participants are taxed each year on all gains not reinvested.
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#182 written by mclever 1 year ago
Actually, GROG, since DC et al have said that the changes in tax rates only affect decisions at the margins, it would be perfectly consonant with what dawolf is saying, that tax rates don’t make any difference when he’s strictly trying to grow his business.
The difference is that, if tax rates have no impact on a business owner’s decision to expand/reinvest in the business, then raising taxes also would not hamper business investment as is so commonly asserted by some. -
#183 written by Max 1 year ago
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#184 written by GROG 1 year ago
mclever,
Actually, GROG, since DC et al have said that the changes in tax rates only affect decisions at the margins, it would be perfectly consonant with what dawolf is saying, that tax rates don’t make any difference when he’s strictly trying to grow his business.
DC’s and Michaels’s claim is that low tax rates DO make a difference when a business owner is trying to grow his business. That’s the claim — “It (low income taxes for small business) discourages investment.”
Dawolf and Max have said tax rates don’t play any part in their decision to expand their business.The difference is that, if tax rates have no impact on a business owner’s decision to expand/reinvest in the business, then raising taxes also would not hamper business investment as is so commonly asserted by some.
If low tax rates do impact a business owner’s decision to expand, then raising rates would also impact a business owner’s decision to expand.
But at least to dawolf and Max, the rates don’t matter. Or is the claim now that low interest rates do play a part in a business owners decision to expand but high rates don’t?
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#185 written by PWS 1 year ago
DC:
I said I’d back up my assertions. It turns out I’m going to grant you quite a bit of what you said. But from a strictly economic view I think I’m correct, and here’s the reasoning.
We’re considering whether higher taxes (on profits) provide an incentive to consume more or to reinvest. Since ultimately investment is intended to provide income which is itself consumed, I want to look at whether investing at higher tax rates ultimately provides MORE to consume than investing does at lower tax rates. This is a very simple example but can be extended
So let’s say you have profit P and tax rate T0. You can either take the profit and end up with P(1 – T0) to consume, or invest it (in a tax-deductible manner) expecting a return of R per year. After a year you’ll have P(1+R) . Since you got the expense in the prior year this is all profit, so if you take it you’ll have P(1+R)(1-T0) to consume, which is clearly more than if you took it in the first year. Also, if you continue to reinvest everything, after n years you’ll have P(1+R)^n * (1-T0) to consume.
The question is, comparing 2 tax rates, T0 and T1, where T0<T1, which gives you the greatest ultimate consumption. I can think of two ways to measure it.The ratio of consumption in the second year to consumption in the first
The difference in consumption between the second year and the first. This is probably the better measure, since people consume dollars, not ratios of dollars
By the first measure, the ratio of consumption is unaffected by the tax rate, and is always just the return R. So a higher tax rate doesn’t give any more incentive to invest than a lower one. And this result stays the same (or rather is compounded) whether you consider one year or 150.
By the second measure, you always have more to consume in the second year under the lower tax rate than you do under the higher. And the difference gets larger and larger the longer you continue investing.
From an economic point of view, the advantage for investment is the lower tax rate.
THAT BEING SAID, it’s not the way people act, which is where you’re entirely right. I did some web-crawling today and everyone agreed that they would rather reinvest their money when the tax rates were high rather than when they were low. Many of them said things like they would hire more people when taxes were high just so they wouldn’t have to pay taxes now. Of course by the above, they’d be better off hiring people when taxes were low, because they’d get more from it. But that’s not how people see it.
Often this ‘investment’ is just trying to pull expenses forward and push income out. Section 179 is a great and very popular example of this. Sometimes they lead to ‘investments’ in tax shelters which have no economic purpose other than to save taxes this year.
So, I don’t see higher tax rates as an incentive to ‘real’ investment, but they certainly do make people want to do anything they can to avoid declaring profits.
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#187 written by Armchair Warlord 1 year ago
GROG,
Considering that most small businesses that are actually small businesses are legally indistinguishable from their owners, many of whom were among the millions of Americans not planning for the future at all…
Yes, precisely.
Do you actually have something to say to refute that or are you back at attempting to refute basic economics with folksy arguments? -
#188 written by dawolf 1 year ago
@ Grog
“So you don’t agree with DC and Michael. Tax rates don’t discourge you from investing in your company.“
We’re talking about different things. I’m talking about an initial investment into a currently very small company, where I consider the tax rate irrelevant: they are talking about re-investment. I actually disagree with them a bit on this though. I would guess that if the company is successful, I will pay myself enough to live the life I want to lead, and additional revenue will go back into the business. Lower tax rates would thus mean I have to withdraw less capital in the first place. SO while the company is very small, tax rates could affect reinvestment.
However, if I was considering the business capital if the company were to become bigger, then I would agree with them. I’m already pulling out enough to live on comfortably, so then I’m looking at reinvestment at x% return verses paying tax and taking as profits and putting into a bank (or buying a house, or whatever). THEN higher tax rates would make me more likely to reinvest.I’m not sure where the exact line would be. Somewhere around £20,000 (after tax) is enough for me to live on comfortably at this stage in my life. That’s about $30,000. Pulling extra money out of the company (if its successful) would then degrade the future potential of the business, but if taxes were low then I would be more likely to take the money out straight away, whereas if taxes were high I’d be more likely to leave it in the business.
I would add though, that I doubt a % or two in any direction would make any difference to what I do. -
#189 written by GROG 1 year ago
AW,
Do you actually have something to say to refute that or are you back at attempting to refute basic economics with folksy arguments?
Refut basic economics? Are you serious? Did you read what PWS posted directly before your post? Basic economics says only an idiot would allow low tax rates to discourage him from investing in his company.
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#190 written by GROG 1 year ago
DC,
And you’re often right, that what works on paper, and the math of what works, too often is not the same as what people do.
So who are these “people” who are knowingly making stupid business decisions. PWS said he found some while doing some “web-crawling”. In fact he said they all agreed. Who are they? Who are these business owners? Why can’t anyone refer me to one? Just one. Just one who says low income tax rates discourage them from investing in their company.
You and about 5 others here think the sky is a different color than everyone else. But since you reside in this sheltered world of Logarchism where everyone pats each other on the head and tells one another how great they are, you think the whole world agrees with you. When you’re challenged, you resort to ridicule and hide behind the other 5 while doing it.
You’ve got nothing to support your theory other than your Logarchism buddies. You’ve got no empirical evidence. No testimonials from any real life business owners or economists.
Yet you smugly try to ridiclue me behind my back because I don’t agree with a handful of far left bloggers and you do it on a thread where you don’t think I’ll defend myself. Your true colors shined through. If wasn’t so funny, it would bother me. -
It could be argued (as Grog does) that a lower small business income tax rate encourages investment in that business so that money can be drawn out more cheaply later. (I don’t buy that argument, because, as PWS points out, people don’t actually think that way — but it’s an argument that could be made.)
But that’s if the tax rate remains low for an extended period. The GOP didn’t suggest this. They suggested a one year temporary reduction.
What is the purpose of a one year reduction in the income tax rate on so-called “small businesses”? Clearly, the only possible purpose is to encourage these “small business” owners to take as much money out of the business this year as possible, otherwise they can’t take advantage of the lower income tax rate.
Recall the premise of my article, that the GOP and the Democrats have very different views of America. This one-year income tax holiday for “small businesses” is designed to encourage wealthy stock manipulators and billionaires like Paris Hilton to take some one-year profits at a lower tax rate.
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Grog,
I’m sorry you took offense at a comment I made on another thread. I was actually thinking of someone else, who had a tendency to provide a lot of quotes that all had ultimately come from the same place (ALEC or FOX, usually), then to quote opinion polls (which have nothing to do with underlying realities of science or economics or whatever), then to gleefully declare himself the winner.
Again, I did not intent to poke at you. I apologize that it could have been taken that way.
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#193 written by mclever 1 year ago
@GROG
DC’s and Michaels’s claim is that low tax rates DO make a difference when a business owner is trying to grow his business. That’s the claim — “It (low income taxes for small business) discourages investment.”
Discourages does not mean stops. If I understand DC and Michael, then all they’re saying is that if a business is in a position to make a choice, then the lower tax rate will encourage profit-taking rather than reinvestment, because the businessman will tend to want take advantage of the lower rate. If the business is strictly growing, then the tax rate won’t affect their decision, because they are reinvesting regardless. If the tax rate is high, then people tend to want to avoid taxes, hence avoiding claiming profits, hence reinvesting in tax-deductible business growth expenses. If the tax rate is low, then there isn’t as much of a tax-avoidance incentive, so the reinvestment may be lower.
It’s not rocket science. Nor is it a particularly earth-shattering realization that people tend to avoid taxes if they can. Perhaps the better way of phrasing the same thing would be to say that high tax rates encourage business reinvestment rather than excess profit-taking. -
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#195 written by Max 1 year ago
dc,
Again, I did not intent to poke at you. I apologize that it could have been taken that way.
And yet GROG still HAS NOT apologized for lying about what shortchain stated and applied that lie to another person. Shameful.
And no, GROG, I’m not hiding behind anyone. I’m stating it to you man to man, because I believe such dishonest behavior SHOULD be called out when it happens. Actually, I believe you should not only apologize to shortchain for lying about his comment, but to the entire list.
Shame on you.
;Basic economics says only an idiot would allow low tax rates to discourage him from investing in his company.
Well, if the considered investment yielded a sufficiently low rate of return, and the lowering of the tax rate, especially a short-term one, caused the opportunity cost of the investment to be too high in relation to that rate of return, THIS idiot would then hold off on that investment for that short-term period. I have yet to see that occur when I was expanding a business, but it COULD happen.
It’s why only an idiot would make a comprehensive statement where many variables exist.
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#196 written by GROG 1 year ago
Max,
Stop your nonsense and get over yourself. I didn’t lie about anything and you know it.
You stated tax rates never played a part in your decision to expand your business. Shortchain said only a fool wouldn’t take tax rates into the equation on whether or not to take profits out of one’s business.
What would you use to to expand your business if not potential profits? That’s what the entire discussion has been about. Whether or not tax rates impacts a business owners decision to invest potential profits into their business. -
All I want to see, in my lifetime, is a Congress with the cojones to straighten out the tax code. All these arguments would be moot if we had a rational tax policy in this country.
Like health care, there are so many vested and entrenched interests that I fear we will never get to that place, and we will go down hard as another country with a rational policy takes over our position as a world leader.
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#198 written by Max 1 year ago
GROG,
Take a breath and calm down. Put on your thinking cap and put your brain in gear before putting your typing finger in motion.
If you don’t know and understand the difference between “starting or expanding a business” and “taking profits out of a business” you are sorely lacking in experience and/or education.
If I am in the mode of start-up or expansion, it may be YEARS before I can take a profit from that business. Undercapitalization is one of the primary reasons for new business failures. Undercapitalization means that the business did not generate enough to either meet expenses over time or did NOT generate a sufficient profit for the owner to live on. Or BOTH! It’s why new business owners are generally cautioned to have sufficient resources to live on for THREE YEARS when they start a new company! Since 50% of new businesses fail in the first 5 years and 70% by the 10 year mark, SOMEBODY AIN“T ALWAYS TAKING PROFIT OUT OF A BUSINESS!!
So you can try to rationalize your LIE however you wish, but now ignorance is no excuse.
And you obviously have no remorse about lying. Denial over the free spending, deficit driving Reagan years is passive. Lying is active.
You LIED. -
#199 written by GROG 1 year ago
If I am in the mode of start-up or expansion, it may be YEARS before I can take a profit from that business. Undercapitalization is one of the primary reasons for new business failures.
That’s not what the entire discussion has been about! It hasn’t been about start ups who aren’t making a profit!
It’s been about how tax rates affect a business owner’s decision to reinvest potential profits back into his business or to invest the profits elsewhere. -
#200 written by GROG 1 year ago
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About dcpetterson (186 posts)
D. C. Petterson is a novelist and a software consultant in Minnesota who has been writing science fiction since the age of six. He is the author of A Melancholy Humour, Rune Song and Still Life. He lives with his wife, two dogs, two cats, and a lizard, and insists that grandchildren are the reward for having survived teenagers. When not writing stories or software, he plays guitar and piano, engages in political debate, and reads a lot of history and physics texts—for fun. Follow on Twitter @dcpetterson






But if you leave your money in the business, then you pay no income taxes at all, and this is true regardless of the tax rate.