Why the tax rate doesn't matter at all

Lot’s of discussions in IP involve tax rates, especially income tax and corporate tax rates, in the US. Arguments about why a tax is too high or too low and how changing it one way or the other will have this positive or negative effect on people’s livelihood and the economy. But I’m here to tell you that the actual rate doesn’t matter in the US. More specifically, shouting about 90% tax rates being too high or 5% tax rates being too low are red herring arguments, except for the special cases of the extremely wealthy who have the ability to move to another country with a lower rate and still maintain their gross income. The only things that matter are:

  1. How much money an individual or family has left over after taxes to spend, and what they can buy with that amount
  2. How much money a company has left over after taxes on revenue or profit to spend, and what they can get for that
  3. How fast you plan to change the tax rate in economic proposals

Many European countries have very high top and middle income tax rates, but they provide more and higher quality consistent services, and there is still enough left over for the individual to enjoy life. Many third-world countries have low income tax rates, but they provide fewer and poor quality services, and there’s still not enough left over for large parts of the population to eke a living. That’s not to say that third world countries should increase their income tax rates - there’s not enough money in the majority of their population to get much more anyway.

Because the US is a fairly open market with respect to the ability to enter a market and start a business and compete, and because it’s a huge market with huge disposable income (including credit for poor and middle income individuals), and with a hugely spending government, b[/b] there will ALWAYS be businesses willing to do business in the US, both domestic and foreign, regardless of the tax rate, be it 5% of corporate profits or 50% (of domestic earnings of course). That’s even the case if the government “cuts back” - they still pay out hundreds of billions and they’ll still be providing tons of services to 300+ million people. That’s even as credit tightens on individuals. b[/b] It is frivolous to argue the economic theory that “companies just won’t produce” or “companies will just leave the market or leave the US”. That might only happen when there are sharp and uneven changes to the taxes they pay, and even then, the gap in service and products would be filled once the new rates settle down.

The government needs X dollars in a given year to pay its bills. Since it’s not a socialist government “controlling the means of production” (not directly anyway), the US government is not producing goods and it is not meant to produce a profit or really sell services or products at all (though it does to an extent). The government MUST pay for itself with taxes. So if it needs X dollars in a year, it must tax for those X dollars, or borrow on the rest. Obviously this is the ideal case, and a million other things are going on, but that’s the basic method. Those X dollars can not come from the poorer income individuals - there’s little money there to take - and it can not come much from the smaller businesses or the poorer performing businesses - again, no money there. b[/b] The money MUST come from high and middle income individuals and from profit-making corporations - and trade duties, which are essentially taxes on the businesses and on the cost passed on to consumers. b[/b] The actual % needed is not relevant, that money MUST be taxed, or else services must be cut or debt must be increased. b[/b] I realize that most conservatives and libertarians argue for just that - cutting services - but they also call for reducing taxes, when the US is not only hugely in debt, but the services they propose cutting are not usually the big dollar items, they’re usually the hot button social issues in the so-called “discretionary” items. Which is why the arguments for cutting “welfare” services (which at their peak were $29 billion a year and over 1/2 of the recipients were children) b[/b] is political grandstanding and has nothing to do with cutting the budget and the debt in any meaningful way.

Again, the % is not relevant. What is relevant, especially to the individual and the local communities (which is what the average person sees and feels everyday (not the millions and the travel the wealthy person sees), b[/b] is how much they can spend with whatever they have left over. These people, if they were to vote on their actual situation, and not vote on some imaginary, unlikely to happen dream (“The American Dream” in which all can become wealthy through hard work and luck), b[/b] would ALWAYS vote to increase taxes on the incomes of the wealthy, possibly on the wealth itself - and increase taxes on the profits well-performing corporations, when the government needs to increase taxes.

What is relevant when implementing tax policy, b[/b] is how fast you change the rate relative to the changes in the economy. Increasing taxes too fast does not provide people and corporations time to adjust to the reduced disposable income, and decreasing taxes too fast on the middle and lower incomes can produce a high rate of inflation. Measured, constant, but guaranteed changes (i.e. locked in and not subject to the whims of the next congress or administration) are the way to go.

As Dennis Miller used to say when he was on the side of righteousness (i.e. a liberal), “But that’s just my opinion, I could be wrong”.