Lower taxes on job creators. What do they do with the excess?

There are some issues with lowering taxes on “job creators” or on the Capitalist Class, and it is not one of fairness, but individual economic reality and what people tend to do with disposable income, the amount left over after paying for all personal costs and taxes

For too many of us, that is a fiction—there is nothing left after paying for what we need to live and for taxes.

I have written on this before and am not going to get into all the numbers this time.

People work for several reasons, sort of like Maslow’s hierarchy: First, we need food, and shelter.  After those needs are taken care of, we enter into the arena of safety and security: maybe buy a house and start putting back money for a rainy day and then start saving for retirement.  When those needs are accomplished—and for too many these never are—many people work for the simple joy of achievement, esteem and recognition.  Most of us never get to the last stage, but “Job Creators” get there quite a bit.

Raise taxes and job creators will not consider hanging it up until and unless they have taken care of their retirement needs. Complain and gripe, yes, but if their retirement is not taken care of, they will continue to work. 

What happens when we lower the tax rates? Savings goes up because there is less of a tax bite. People do not start business just to create jobs for others; they do it to provide for themselves and their family.

If money taken out of a business is taxed at 90%, very little will be taken off the table and saved. Tax it at 20%, the sting is much less to do that. This is one of several reasons the economy grew as it did from 1945 to 1980—the marginal rates were so high (many years at 92%) it made more sense to invest in the business than to take the money off the table and save it.

Buying stock on the stock market does not put money in the company.  That happened at the time of the Initial Public Offering.  Investment in traded stock is done with saved money, money taken out of businesses; it is not investment in the business and does nothing to help the business in hiring people or buying capital assets.

The Laffler curve demonstrates the relationship between income tax collections and tax rates. Too low or too high and insufficient funds are collected.  There is a sweet spot in the middle below which rates should not be cut. I was taking an advanced macro economics theory class when this started being discussed and the problem with it is no one knows where the points are.  The theory is valid, but putting into practice is trial and error. This inability to achieve anything approaching precision is one reason I decided to not become an economist. (I told my instructor I didn’t understand it and she told me no one did but that should not be a reason not to become an economist.) Further, the math necessary is no longer in my grasp. The theory, I recall and when I read the papers, I can still follow the math, but can no longer do it or explain the specifics.

This area is so complex that no one can say with certainty how a change in any given tax rate will affect anything. Everyone has a theory. When trying to evaluate one variable in economic theory, one has to assume “all other things being equal.”  Problem is, they never are.  Nothing is ever exactly the same as it was before, the result being what worked once may work again or it may not. 

The image at the top is one possible non-symmetric Laffer Curve with a maximum revenue point at around a 70% tax rate, based on “How Far Are We From The Slippery Slope? The Laffer Curve Revisited” by Mathias Trabandt and Harald Uhlig.

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