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The Bush tax cuts are about to expire. And somehow that is Barrack Obama’s fault. Now, the fact of the matter is that Obama wants to keep the tax cuts in place for all but those making under $250,000. That’s most of us. And he wants to allow the tax rates for the rich guys to return to where they were under Ronald Reagan. Remember Reagan? Conservatives love that guy. But apparently he taxed rich guys too much, just like Barack wants to do. Now, most of us like the idea that the people with plenty of money pay plenty of taxes. After all the deficit is growing and Republicans want to do whatever they can to fix that. Well, whatever they can that doesn’t raise taxes on the rich. But they don’t put it that way. They say that this tax “increase” will hurt small businesses. Hold the phone! Small businesses! Nobody messes with small businesses! Now I’m feeling all conflicted. People out of work. Small businesses create jobs. Etc. Only here’s the deal. It doesn’t really work that way. Here’s the way it works:

Step 1: The Brookings Tax Policy Center estimates that only 1.9% of small businesses are in the two top brackets that would be affected. That’s a little better than the dozen small farms affected by the estate tax, but not by much.

Step 2: About half of that 1.9% aren’t really small business owners at all. They’re high-income investors who get part of their income from investments in small businesses. So we’re down to about 1% of small businesses that would be affected.

Step 3: The top brackets are just that: brackets. When the top rate goes up, it doesn’t affect your entire income, just the portion in the top bracket. So if the top rate goes back up from 35% to 39.6%, it only affects the portion of income above approximately $400,000. A small business owner making $500,000 would see an increase of about $5,000. This is a fairly modest amount for someone making a half million dollars, and anything higher than that is hardly a “small” business to begin with. And the marginal effect is even smaller for the second highest bracket.

Step 4: The Office of Management and Budget estimates that the 10-year cost of these upper-income tax cuts is $678 billion, the vast majority of which hits wealthy individuals, not small businesses no matter how you define them. That’s a fair chunk of change for anyone concerned about the deficit.

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4 Comments

  1. Three people lived on an island. In this little economy, on average, with your bare hands you could catch one fish a day. The little island had a productive capacity of three fish a day. It was enough to keep you from starving but that was about it.

    Then one day one of the fisherman had an idea. “I will forgo fishing for a day and build a device to help me catch more than one fish a day.” While his friends fished, he went hungry and built a device he called a net. Instead of consuming, he invested his time and built a piece of capital that would allow him to be more productive.

    Sure enough he could catch two or three fish a day, while his friends could only catch one. The productive capacity of the island had grown from three to five fish a day. But, since most of us like the idea that the people with plenty of fish pay plenty of fish taxes, his two friends voted to take half his fish (it was a democracy you see). That was great for the two friends, they had never had to go hungry and now they could even eat more (the wonders of a democracy). Soon our friend saw the futility of going hungry, investing his time and taking risk of failure. Now there is no net and they all catch, on average, one fish a day.

    I guess it doesn’t work that way though!!

    • Clearly it doesn’t.

      Success is always taxed. And it is never a disincentive. Clever people who make big bucks, enjoy the process.
      It is striving after wind.

  2. Why not take a 100% away since it is NEVER a disincentive. Then those clever people can really enjoy the process.

  3. This bit of brillance heard on MSNBC, “the high earners would only save or invest the extra money anyway”. Excuse me, it’s savings and investment that is the only way to get out of a financial pickle.


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