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December 03, 2010

Comments

You started off with a relevant issue - the administration's desire to penalize taxpayers who make > $250,000 - and veered off on a completely irrelevant tangent. Regardless of whether these folks are small business owners or whether it will affect their hiring practices, the real question that we (Republicans) have is, "Why is this administration vilifying and penalizing economic success?" I don't care if the tax cuts are extended or not but I see no justifiable reason for extending them for some people and not for others based on an arbitrary cut off point that separates the "rich" from the "poor".

Half Sigma,

As much as I agree with your assessment of taxation, you're saying that the Republicans are morons for their tax policy. No they're not. They know exactly what they're doing by demagoguing about "small businesses". Its called bullshitting.

They realize that their bastardized and absurd definition of small business means anything but small businesses. As with most issues, they're banking on both the general ignorance of the American populace and the disinterested idiocy of the mainstream media to fail to understand the semantic horseshit game they're playing.

At some point, you're just going to have to accept that the Republicans exist to protect the wealthy (against national interest), even if most of the people who vote for them are dirt poor and hopelessly stupid.

Perhaps I'm missing your point, but I think you're wrong here.

Many Small business are S Corporations - meaning that profits from such businesses are added to owners income and taxed as income at the personal income tax rate.

If expenses go up, profits go down. That seems like the most basic logic, however you seem to be disagreeing. I'm not sure that I follow your line of reasoning.

Finally, it's worth pointing out that the argument is that increases in marginal tax rates discourage marginal investment. This argument ultimately logically transforms into the proposition that people are more likely to do additional work if they get paid more for doing additional work. Do you really not believe that?

Most small businesses are organized as S corporations, as I suspect you know. Profits are withdrawn from the corporation and distributed to shareholders every year--they are then required to pay personal income taxes.

The harm caused by higher taxes is to thus reduce the earnings available to the shareholders, and reinvested earnings are the lowest cost form of capital. Business theorists like to claim that debt is just as cheap (if not cheaper) since interest payments can be deducted, but principle payments are not and debt makes a company more vulnerable to bankruptcy in the event of a decline in business.

I think it should also be noted that the marginal propensity to save tends to directly vary with income, and thus lower taxes would result in an increased savings rate, improving future capital formation. Naturally this is not true if the decrease in tax receipts is not offset by an equivalent decrease in government outlays, hence why the Reagan tax cuts had relatively little effect.

The solution should be obvious. Encourage (or coerce) more incorporation as C corporation, lower overall C corporation tax rates (currently among the highest in the OECD), sharply reduce or eliminate taxes on retained earnings, and allow capital expenditures to be immediately written off.

If the government wants to use tax policy to immediately stimulate employment levels, it could reduce payroll taxes (tax wedge). While a lot of this would just increase staffing levels in service businesses of marginal value, it would also immediately increase the competitiveness of American manufacturers. If combined with your minimum wage suggestions, then nearly all of the benefit would accrue to manufacturers.

This may seem like criticism, I agree with the general thrust of your post. Most small businesses engage in marginal services that do not contribute to productivity growth or technological innovation. They also pay relatively low wages, and the high rate of business startup and failure in the United States squanders enormous amounts of resources. A lot of small businesses are also parasitic government contractors which rely on affirmative action (nearly all black-owned small businesses fall into this category) or poorly thought out rural-industrial policies (e.g. HUB Zones). Additionally, there is very little correlation between personal income taxation and long run economic growth, as should be obvious to anyone who has visited Western Europe any time in the past half century.

What America needs isn't low taxes or low interest rates, but a well thought out industrial policy. Taxes should be considered a powerful tool for conducting industrial policy in a capitalist economic system, not as a dragon to be slain at all costs.

"So what exactly is the link between small business employment and income taxes?"

The link is that many "small businesses" are S-corporations and therefore are taxed at individual tax rates, not corporate tax rates. Raising individual tax rates therefore raises the respective "corporate" tax rates on Subchapter S corps. If the small business must pay more taxes, the idea is that it then has less disposable income to hire more employees, raise the salaries of current employees, or otherwise grow the business. People think of "individuals" making over $250,000 as the monocled Monopoly Man, but in fact, it describes many small businesses as well.

Despite this blog's entry's implied knowledge of the tax code "better than the morons in the Republican party," you betrayed no knowledge of how S-corps work.

[HS: S-corp profits are calculated AFTER employee expenses are deducted. The tax rates have nothing to do with whether a business would want to hire more employees.

Futhermore, S-corps are obsolete. No one does S-corps anymore. So why should I write about them? LLCs which opt into partnership taxation is what people with good tax advice do.]

There's also the fact that many small businesspeople, especially service providers, "work mostly for cash" and report for tax purposes only a fraction of their actual incomes. I've encountered this quite a few times.

I am a small business owner that benefits from the Bush tax cuts. With the money that is left after I pay income, social security and a variety of other taxes, my wife and I employ (outside of my business) an assortment of workers: a housekeeper; a horse trainer; a handyman; yardmen; a family that washes our cars; a ranch foreman; and horse shoers (among others). None of these other "employees" want to see my taxes raised, because each benefits from the added money that is made available via the lower tax rates. Thus, the suggestion that lower tax rates on people like me have no impact on employment is absurd.

"HS - Futhermore, S-corps are obsolete. No one does S-corps anymore. So why should I write about them? LLCs which opt into partnership taxation is what people with good tax advice do."

This is definitely not true.

There are reasons why an LLC is superior to an S-corp for some businesses but for a business that generates more income that the owner would need to rightly claim as income the S-corp is vastly superior. The k-1 form for an S-corp requires no social security or medicare taxes to be paid on the earnings. An LLC requires social security and medicare taxes to be paid on all the earnings of the LLC (of course SS hits a limit eventually but medicare does not). And of course LLC and self employed FICA taxes are double of what W2 FICA taxes are for an employee.

So if a company had 200K in profit and was an LLC the owner would pay 12.4% tax on 106,000 and another 2.9% tax on the full 200K for a total FICA tax bill of $19,000.

If that person could show a reasonable salary for their labor in the business was 50K, they would pay themselves a 50K salary and pay 12.4% + 2.9% on the 50K and no FICA on the rest of it. This would give them a FICA bill of about $7,700. The difference is $11,300.

The above scenario is not a strange abnormality. It happens quite regularly. So if you think $11,300 in tax savings is irrelevant then I suppose you are correct that the S-Corp is obsolete.

BTW, I agree with you that the tax increase on the rich argument is a strawman and the idea that a 4.6% increase in tax rates is going to make someone decide to work less is pretty laughable. Especially when we have already had this tax rate in the 90s and I don't know of any stories of business owners saying 35% they would work but 39.6%, nope, pack it in and don't try to expand, not worth it. It's laughable.

But you should get your facts right. S-Corp is a very viable and useful entity and saying it is obsolete doesn't help your argument.

[HS: That S-corps are still viable appears to be correct (or if you want to be cute, an LLC which checks the box as a corp and then elects S-corp status).

They never taught S-corps at NYU. I guess that's because a hedge fund can't be an investor in an S-corp, and what's the purpose of a business entity that hedge funds can't invest in?

This does demonstrate that being an S-corp severely limits your ability to raise capital. A hedge fund investment would cause your S-corp to become an unfavorably taxed C-corp.

But I guess that S-corp is fine for operating a bodega or a pizza parlor.]

I write this comment not to enter into a debate with you, because the time and effort of an anonymous online debate is not worth it. Rather, I write this in the hopes that it will make a marginal difference in getting you to stop writing about economics, because I enjoy your other posts.

Your posts about economics are terrible.

I'm relatively new here, but from what I've seen so far, Dan makes a good point.

[HS: Oh my god! I've written something that disagrees with the Republican party talking points. Half Sigma must be EXCOMMUNICATED.]

HS:

Macroeconomics is basically completely fraudulent and ignorance of the details of its theories isn't a terrible thing when writing economics commentary. It's the climate change of economics: the selection mechanism for what gets to be macroeconomics or climate science has no relation to truth value of those predictions.

Microeconomics, on the other hand, isn't fraudulent and provides useful frameworks for understanding and in a limited way predicting human behavior. Before you write another post like this you should probably gain some level of familiarity with the content of microeconomics. Quite a few smart people have studied these issues in a systematic way and come to very well supported conclusions that don't agree with your writings in any way.

[HS: Smart people like Paul Krugman who has a Nobel Prize and is a professor at Princeton University?]

Small business owners are not holy , but they are admirable. You cannot succeed as a small business owner without providing services that people want, and making them happier. As sleazy social climber might be able to creep up the ladder of a big company and make a lot of money as an executive vice president without actually benefiting anyone, but this is impossible in a small business. There just isn't enough money going around to support leeches. Plus, all big companies were once small ones started by people who took on large risks in the face of an uncertain payoff. This is admirable, and is responsible for the prosperity we enjoy today.

There are two ways to look at tax/spending policy. One way is for the government to decide what individuals need, and take the rest. The other way is for individuals to decide what the government needs, and keep the rest. I prefer the second way.

@Barbara

You see no reason why we shouldn't extend tax cuts for everyone.

How about that fact that is will cost $700bn that must be borrowed. How about there is no evidence that these lower tax rates have done anything to stimulate the economy and instead have put us in a precarious fiscal situation. How about that the top 1% have been absorbing more and more of the income pie while the middle class has been losing ground for the last twenty years. How about a more stable society through a reduction in severe inequality. How about reducing the reoccurance of asset bubbles and crashes produced when the rich being flush with cash chase limited assets.

"I am a small business owner that benefits from the Bush tax cuts. With the money that is left after I pay income, social security and a variety of other taxes, my wife and I employ (outside of my business) an assortment of workers: a housekeeper; a horse trainer; a handyman; yardmen; a family that washes our cars; a ranch foreman; and horse shoers (among others)."

1) You are a small business owner *who* benefits, not "that benefits" from the Bush tax cuts.

2) You should use commas to separate your different categories of workers, not semicolons. Semicolons are appropriate when the things you're listing already contain commas. For example: "I sent letters to the following cities: New York, NY; San Francisco, CA; [and so on]"

3) People who own horses know that the "horse shoer" is called a farrier.

"I am a small business owner that benefits from the Bush tax cuts. With the money that is left after I pay income, social security and a variety of other taxes, my wife and I employ (outside of my business) an assortment of workers: a housekeeper; a horse trainer; a handyman; yardmen; a family that washes our cars; a ranch foreman; and horse shoers (among others)."

1) You are a small business owner *who* benefits, not "that benefits" from the Bush tax cuts.

2) You should use commas to separate your different categories of workers, not semicolons. Semicolons are appropriate when the things you're listing already contain commas. For example: "I sent letters to the following cities: New York, NY; San Francisco, CA; [and so on]"

3) People who own horses know that the "horse shoer" is called a farrier.

Why don't the Republicans just announce a 90% income tax rate for lawyers? All non-lawyers will cheer, and I gather that lawyers vote Democrat anyway.

There is a continuing theme of hostility toward "Middle America" on this blog. The basic idea seems to be that the "proles, the White working class, the small business owners" are some collection of trash that get in the way. I think this attitude is a wee bit overblown.

Matt Ridley made an important point recently. Technological advances alone don't ensure human progress. It is only when these advances are produced on a mass scale, and made available to the majority of people that a society advances. Most of the technological advances necessary for the Industrial Revolution had been around for at least 1,500 years, including the use of steam, but no Industrial Revolution took place for centuries.

The mass production of goods and services requires a large middle class with bourgeois values to be effective in the long run - at least this is the Western experience. As Gregory Clark has pointed out, the population itself underwent genetic and cultural changes that made these middle class virtues possible in England - and that was the key to progress.

Note how impotent "elites" are without a vibrant middle class. There have been many high IQ elites within societies throughout history - China, Persia, Egypt - but those societies stagnated and collapsed without a broad base of working class and middle class people with bourgeois virtues.

So let's hear it for the proles, the working man, and the shop keepers! Hurray! And thank you for making our middle class lifestyle possible!

[HS: Futhermore [sic], S-corps are obsolete. No one does S-corps anymore. So why should I write about them? LLCs which opt into partnership taxation is what people with good tax advice do.]

[HS: They never taught S-corps at NYU.]

What else didn't they teach at NYU? S corporations have been the most common corporate form for over ten years and outnumber LLCs by severalfold.

http://www.irs.gov/taxstats/bustaxstats/article/0,,id=96405,00.html

HS,

Get thee to a tax accountant. You don't understand how small busineses operate.

Even though your observations are a cogent rebuttal to the drift of Republican talking points on the issue of whether, or to what extent, the nation should continue with current tax rates, it remains the case that the federal government receives far more revenue tan it needs to do anything it should be doing. Where should we cut? Departments of: Education, Energy, HHS, HUD, Labor, Transportation, Interior, Commerce, FTC, FCC, Fannie Mae, Freddie Mac, Gennie Mae, Interior, and Energy, just for starters. Some would require a phase out plan, others could be profitably shut down this very minute. All are useless, most are destructive; at least half are blatantly unconstitutional.

quote from HS:
"Higher income taxes are just as likely to encourage more employment. “If the government won’t let me keep the money myself, I may as well spend it on another employee.” "

*really? seriously? really?*

I have a better idea. How about this?
If I'm running a widget factory 7 days a week making more than $250,000 I can shut it down for 1 day a week, run it 6 days a week instead, (and lay off workers) thus keeping my income under $250,000 and avoid having to pay the extra tax.

Why should I work if I'm not going to get to keep my money?

"Why do we put small business owners on a pedestal, anyway?"

Virtually all net job growth comes from small businesses. If small businesses are not hiring, then unemployment will remain around 10%. Thus, improving the health of small businesses is the key to ending the jobless recovery.

Also, all corporations today were once small businesses. So without small businesses we would still be in the stone age. This fact, and that they create the jobs, earns small business owners deserved recognition for sticking their necks out and starting businesses.

1. There is indeed respectable empirical evidence from Princeton economists that the “income tax” rate of the sole proprietors effects hiring of labor. Of course as HS suggest this effect is likely minute for a 4-5% tax increase.

http://ideas.repec.org/p/nbr/nberwo/6578.html

2. Small business and Sole proprietors are at any case equal to “entrepreneurs”, as I show here

http://super-economy.blogspot.com/2010/12/my-job-market-page.html

The main tax that entrepreneurs are worried about is the capital gains tax. A tax which President Obama wants to raise.

Thorfinnsson says:
"Additionally, there is very little correlation between personal income taxation and long run economic growth, as should be obvious to anyone who has visited Western Europe any time in the past half century."

That is true but..........Western Europe has lower corporate tax rates than America
http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg

There is a myth that Liberals would like us to believe and that is Europe became prosperous by taxing the rich heavily. This is of course false. The reality is Europe has very pro-business tax policies.
Take a look at the Nordic countries which have a reputation for being "socialistic" they have corporate tax rates of under 30%. That's enough to make a supply side Reaganomics believer nod his head in approval.

I personally should think fed should go away completely. Only local and state taxes to spend on initiatives you can actually see and control being implemented. Fed can go gck himself and their SS, medicare , medicaid, dept of education, TSA,non existent border patrol etc. And yeah even military.

All those things are much better done locally , every US state is large enough and sufficient enough to be self run.

"Why do we put small business owners on a pedestal, anyway?"

Because society owes them an enormous debt, and because big businesses most often start out small. There are plenty of potential Rockefellers and Gates that should have the opportunity to grow and serve society by bringing more goods and services to more people, and serving an increasing number of shareholders. Keep in mind that business is humanity's greatest achievement because it exponentially increased humanity's average standard of living and options. Because of business, people have cars, necessary appliances, energy to keep warm and cool, and technology has improved at a very rapid rate because of businesses.

Those who most often attack capitalism are ironically typically those who benefit the most from it. People oftentimes attack and smear captains of industry, without whom America would have a far lower standard of living than it does today. For instance, John D. Rockefeller, Jay Gould, and Andrew Carnegie enormously benefited the working and middle classes by providing them jobs, goods, and services. Business owners benefit society far more than any politician or religious figure.

It would be great if the government could have reasonable regulations (e.g., making it illegal to feed one's children fast food while abolishing the restrictions against afterhours trading and insider trading), reasonable laws, and a well-informed populace and government officials who temper their passions and faith and exercise reason in public matters. However, current trends are contrary to this and thus it shouldn't be expected.

People largely attack value creators because they are envious, and for the same reasons a parasite typically hates its host. For government bureaucrats, priests, and others need the productive value creators to survive. Politicians also have an interest in attacking competitiveness and free enterprise because by doing so they hide their own faults and shortcomings while supporting illusions of their own power and false sense of esteem.

"It would be great if the government could have reasonable regulations (e.g., making it illegal to feed one's children fast food while abolishing the restrictions against afterhours trading and insider trading), reasonable laws, and a well-informed populace and government officials who temper their passions and faith and exercise reason in public matters."

It takes a fair amount of chutzpah to advocate for insider trading in the current economic climate.

Guess what, Jay? Fast food is not poison. Unless the laws of chemistry are different in your kitchen, you are not going to make fried chicken or mashed potatoes that have any appreciable difference in nutritional content than what the Colonel serves up.

P.S. When are you going to publish my comment on your blog that aspartame is not poison? It's been about a month now.

Wouldn't a simple flat tax rate be best? Some might claim that it would be regressive considering it hits the disposable incomes of lower earning citizens hardest, but its simplicity and elegance means less, time, money, and effort is expended by everyone involved. Lower transaction costs and reduced complexity means that entire economic rent seeking niches (the tax lawyer and many political lobbyists) become obsolete overnight.

A good thing no?

"I have a better idea. How about this?
If I'm running a widget factory 7 days a week making more than $250,000 I can shut it down for 1 day a week, run it 6 days a week instead, (and lay off workers) thus keeping my income under $250,000 and avoid having to pay the extra tax.

Why should I work if I'm not going to get to keep my money?"

Wow, some people are really bad at math. I'm wonder if he is a troll or whether he is just that stupid.

-At some point, you're just going to have to accept that the Republicans exist to protect the wealthy (against national interest), even if most of the people who vote for them are dirt poor and hopelessly stupid.-

Crazy, I know. I'll never forget how Obama opposed the bailout. Dodd too. Krugman, Orszag and Geithner spoke against it loudly as well, but to no avail. The Republicans pushed it right through. There was no stopping them. However, it does make me feel good that the current president never took money from Goldman Sachs and never, ever met with Lloyd B.
And on a related note, Rangel pays taxes and Kerry parks his yacht in Mass.
Lastly, there's this:

http://zombietime.com/obama_visits_billionaires_row/

I can only imagine how he put them in their place! Power to the People!

According to socialistic doctrines, all physical property belongs to the public regardless of who actually created the property and insider-trading laws are an intellectual property equivalent. Insider trading laws assume that all information regarding a company belongs to the public. Also, just because a company sells its shares to the public does not mean that knowledge gained within a company about its plans and products also belong to the public. Inside information about any company, such as its trade secrets and strategies, are assets that belong solely to shareholders and shareholding executives. Only a firm's owners have the moral right to decide how their employees can use such information and not government bureaucrats. Government bureaucrats should have no say in the matter as no fraud is involved, and the state acts immorally when it enforces these laws.

No one said anything about fast food being poisonous; it is simply unhealthy and exacerbates obesity. While many of the founders of fast food chains such as Colonel Sanders and Ray Kroc were moral and rational people whose hearts were in the right place they lived during a time with less information than is available now. Fast food contains MSG, which is an excitotoxin, while trans fats deplete good cholesterol levels while raising bad. They also clog arteries for longer periods of time than natural fats do.

When more people become better informed then various fast food and soft drink companies will have to switch plans and cater to a new demand for healthier alternatives. For instance, fast food places could start serving ostrich and bison burgers (I'm sure that at least some do already) in addition to organic sweet potato fries. What about the higher overall fat and sodium content and the inferior ingredients used to cut expenses?


Here is a source regarding aspartame:

http://www.slate.com/id/2070686/#sb2070699

I apologize about the comment; I removed the Intensedebate feature before being aware of your comment. Now it's easier to approve after getting rid of the third party commenting widget.

"Wouldn't a simple flat tax rate be best?"

Yes, that way neither wealth nor poverty is punished. Both the regressive and the progressive taxes are unfair.

HS,

Condescension does not make your arguments more compelling. S corps are still very useful. My CPA tells me so.

Hedge funds are irrelevant to funding millions of businesses that have to raise funds other ways. These businesses matter. What they do matters to our living standards. A very large fraction of the economy is businesses that can not raise money thru stock offerings or hedge fund investments.

So how do smaller businesses raise money? They can try for a bank loan. But if the bank does not understand their business model or they have only a short revenue history or for other reasons then bank financing is out.

So what do people do? They save from their profit streams and invest in later years. I know people who do this. They make a lot of money consulting and use it to buy equipment to develop products.

I know a guy who started a tech company that ended up making tens of millions of dollars (owns multiple mansions in extremely high priced SoCal) and he started it from his day job and a mortgage on his house. Then he continued to expand it with profits. No outside investment. No hedge funds. I know other guys who've done similar.

If you raise taxes on the top 5% the more entrepreneurial among them will have less money for business starting and business expansion.

Maybe I'm restating the obvious, but the original post missed the obvious. My S Corp is taxed on its profit, not just my income, or actually, what I take out of the corporation for personal use. What I don't take out for distribution stays in the corporation ... I can't start at $0 in the bank every January, get it?

So, the a higher tax rate means less operating capital for my S Corp for the coming year. Maybe not enough to hire an employee, but perhaps I won't buy a new computer or printer, or I might cut back on cleaning services. The feds will just use it to make interest payments to the Chinese.

This is really simple stuff, but I remember how many students drop out of the business program because of the accounting class.

Honestly, this sort of post is bordering on the idiotic. First off, running a blog is not running a business.

Second, although you're right that employee salaries are deducted ahead of computing tax liability, you completely miss how businesses (real ones--I own three) take on new hires. They do it by EXPANDING. And where do the resources from which to expand come? From the accumulated resources of the business owners. You're comment about interest rates just cements how little you know about real small businesses.

Rule 1: Financing a small business expansion out of debt is a sure fire way to bankruptcy to the poorhouse. Any rational small business owner (and they aren't many) knows how vulnerable they are to caprice and failure. Small business owners typically put their houses on the line when signing leases (because of the pass through) and we are very wary of the drag that debt servicing can be on income when sales go down (as they've tended to do lately). So if we don't have the assets on hand to expand, we won't. And more to the point, interest for small business loans are NOT zero. When's the last time you personally checked with a bank?

And where do the assets to expand and hire come from? After tax income, of course. Anything that eats into that eats into the ability to get rich (of course that's the motivation--whoever thought it was otherwise?) eats into the ability to do all that comes with it--including hiring.

Here's a rule of thumb: If you're going to talk about scandals involving children (l'affaire Trig), talk to people who actually have children. And if you're going to talk about small businesses, talk to people who've actually risked everything to open one and live in constant fear that the day is coming when they'll have to shut down.

High taxes lower business ROI and thereby reduce investment. High income taxes redistribute money away from those with high savings rates to those with low savings rates, and thereby reduce investment.

"If I'm running a widget factory 7 days a week making more than $250,000 I can shut it down for 1 day a week, run it 6 days a week instead, (and lay off workers) thus keeping my income under $250,000 and avoid having to pay the extra tax.

Why should I work if I'm not going to get to keep my money?"

Let's say you are a business that makes $250,000 profit and pay whatever the tax is now and now you have a deal that will make you another $250,000 profit. Are you telling me you won't make that deal because you'll have to pay a few more percentage points in tax on the $250,000 extra profit? If it's a 5% increase, you'll have to pay an extra 12500 on the extra profit.You're going to turn down 150000 after tax profit just because you can't keep 162500? Just some questions. Maybe I am missing something.

Tax rate assumptions are 35% and 40%. I am not sure of exact tax rates. Even if you don't want to do the job, won't another business step in and take that job?

Your scenario might work in you are literally digging a ditch with a shovel and have to pay 90% of your income after a certain amount earned . All the extra effort digging might make you say it's not worth it if the gov't takes 90%. But then someone else who isn't into the high tax bracket may take the ditch job you wouldn't take because it's worth it to him.

Are you going to hire more people if you don't have a project? Maybe you would hire a salesman to get more business,but you are not going to start making too many things until you have orders, are you?

What was the top personal tax rate in the 70's when Gates and Steve Jobs started their companies? Much higher, I think. And that was in an industry(computers) that wouldn't exist without gov't spending.

Posted by: dk
"Wow, some people are really bad at math. I'm wonder if he is a troll or whether he is just that stupid."

*gales of laughter*
You fail to realize an obvious point.
You and I share something in common, we both think we're the smart one.

HS,

You have an MBA and economics degree, right? What kind of an economic illiterate thinks that a sharp reductions in after-tax return on investment won't have any effect on the amount of investment?

As Mankiw has pointed out in his blog, even Joe "Stalin" Stiglitz (the left-wing professor from Columbia business school) acknowledged in an academic paper the dead-weight loss incurred by high marginal taxes on high incomes. Before he became a 100% hack, Krugman probably did the same at some point in scholarly papers that he didn't expect to be read by ideologically blindered NYT readers.

High marginal income tax rates hit small business ventures especially hard because of the variable nature of their profits that can cause a good year to return a painful tax hit. A guy who makes $0 for three years and $700,000 in one years takes a much bigger tax hit and ends up much worse off that the government bureaucrat who makes $170,000 year-in and year-out regardless of the business cycle.

And that's in addition to the fact that high marginal taxes discourage expansion and hiring for ALL business structured as an S-corp or LLC regardless of size. It's effectively a way to raise the corporate income tax in a country that now has the highest income tax in the developed world.

If you're thinking of expanding your business, you weight the risks and rewards. It's ECON 101 that businessmen weight their risks and rewards in deciding how much human and monetary capital to deploy.

So hell yeah, if you're deciding to hire someone and incur extra risk, it will certainly affect your long term decision making if your not-so-silent partner Uncle Sam decides he wants an even bigger slice of the upside.

You're a software guy right? Suppose you could keep hacking away making a decent living making $245,000 of taxable income OR take a riskier path that requires investing your savings, hiring employees and only has a 50% chance of a payoff of $500,000 (in addition to your day income) in a few years. You'd be a fool not to consider that in NYC well over 50% of the upside is going to your involuntary partners from the government. Why risk your sanity, lifestyle and savings when some thugs from the government are going to take MOST of the reward?

You're making an argument that's so economically ignorant that even hard-core left-wing economists don't make it honestly (they would argue that the last economic growth is worth it because of greater income equality or some other nonsense). Even the Europeans see the destructive nature of high marginal taxes on business profits.

-Mercy

I think there is a reasonable argument to be made for insider trading. I simply said such an argument requires chutzpah at the present.

"No one said anything about fast food being poisonous; it is simply unhealthy and exacerbates obesity...Fast food contains MSG, which is an excitotoxin, while trans fats deplete good cholesterol levels while raising bad. They also clog arteries for longer periods of time than natural fats do.

When more people become better informed then various fast food and soft drink companies will have to switch plans and cater to a new demand for healthier alternatives. For instance, fast food places could start serving ostrich and bison burgers (I'm sure that at least some do already) in addition to organic sweet potato fries. What about the higher overall fat and sodium content and the inferior ingredients used to cut expenses?"

Your plea for better information is comical in light of your SWPL nutritional illiteracy. It is not even accurate to say that fast food is "unhealthy". Can you make fried chicken that is in any way appreciably different in nutritional content than what is served at KFC?

The consensus view among toxicologists is that MSG is not toxic to humans. This is lucky for us because as an amino acid, glutamate is found is just about all the plant and animal protein you eat (including organic bison, which also contains transfat). The Japanese discovered MSG because of the abundance of seaweed in their diet. This must be why the Japanese are known for having the world's most unhealthful diet and shortest average lifespan.

"Organic" is a SWPL shibboleth. The food is no more nutritious than conventional food and, moreover, is not free of pesticides. All farmers use pesticides, herbicides, and fungicides. They simply must be natural. Most educated people know that "natural" does not mean "harmless". For example, rotenone as a pesticide. The relevant CFRs are here: http://tinyurl.com/22nf673 Of course, some synthetic substances are allowed by the USDA in organic food production as well. And of course, if any of your organic food is imported, who knows what standards govern it.

"Here is a source regarding aspartame:

http://www.slate.com/id/2070686/#sb2070699"

That's rich. I didn't realize that Slate was a peer-reviewed "source". The fact is that unless one has PKU (which is why all aspartame-containing foods contain such notice), aspartame is not a problem.

Inspired by Dr. Cohen, I offer this challenge. I will ingest, gram for gram, as much artificial aspartame as you do natural rotenone.

HS, not wanting to be critical, but as noted several times above, this post of yours was something of an embarrassment. Your perspective on the issue is, to put it bluntly, parochial and uninformed as to the facts.

You can either abstain from posting on issues on which you uninformed, or you can adopt a much broader perspective -- in which case you may cease to be the HS of the present.

Change is painful, yet often a necessary part of personal growth. Highly recommended.

If a owner can make money off an employee, post all expenses, she will hire him regardless of the taxes.

HS: Oh my god! I've written something that disagrees with the Republican party talking points. Half Sigma must be EXCOMMUNICATED.

OK, all kidding aside, I would commend to your reading the Marginal Revolution blog, by economists Tyler Cowen and Alex Tabarrok. Cowen does most of the posting. He's the least ideological, most evidence-driven econ blogger I've ever read.
- JP98

What no one ever talks about is the "hidden tax" of overly burdensome regulation.

Most small business owners that I know spend many hours researching and complying with tons of ridiculous regulations, and spend many hours chasing down permits and licenses that are nothing more than fee-generating devices.

Tax policy may or not be a deterrent to small-business growth, but I can guarantee that excessive regulation IS.

The government should have to cost-justify new regulation before enacting it, and the government should be required to harmonize all new regulation with existing regulation to ensure that business owners are not subject to vague, contradictory requirements.

For small business owners - and I'm one - it's all about how much money I have left when all the expenses are paid. Taxes are just another expense, and if I want to have, let's say, $250K net at the end of the year that's mine free and clear, then I have to work backwards from that assumption.

Employee salaries are just one expense, and so are my personal income taxes when viewed in that context. If I'm paying an extra few thousand a year in taxes, that means maybe I don't hire an additional employee, or maybe my employees don't get a raise that's quite as generous, or maybe I cut back on other business expenses such as advertising, travel & lodging, or what have you. By itself, my business influences nothing in a macroeconomic sense. But if hundreds of thousands of small business owners all act in a similar fashion, then yes, higher taxes do affect the broader economy.

I think most of the outrage against the original post is bullshit, completely missing the main arguments.

-Republicans relentlessly charge that high personal income taxes prevents small businesses from hiring more workers. This is false, as noted and quoted above, because workers are hired from pre-tax income. If it's profitable to add a worker, then a business-owner will do so.

-We are talking about a specific tax on those who make more than 250,000 a year. How many small business owners does that cover? They want to conjure up images of the local florist as the backbone of America, but if Ms. Kim isn't anywhere near the top 2%, then none of this shit matters.

This reminds me of the so-called "Death Tax" and how "family farms" were seized by the government. Reporters were sent out to the midwest to document these tales... and found nothing. Fuck, when it came to passing that bill Democrats and moderate Republicans negotiated to exempt the first 100 million dollars of an estate, and Republicans said no. Fine, but let's be clear that these arguments have more to do with a particular ideology and the role of government rather than invoking cherished images of the pastoral heartland.

If my experiences are any indication, the vast majority of Americans have no idea how a graduated income tax works. They think that if you make more than 250,000 thousand dollars, then ALL of your income is subject to a higher tax, meaning an individual earning $249,999 will (somehow) have more disposable income than if she earned two dollars more.

And that's the argument Obama should be making. He should be telling people that by keeping tax cuts for all the other brackets, the rich still benefit, but they save only (on average, off the top of my head) ~$60,000 rather than hundreds of thousands of dollars. Now maybe 60,000 in savings isn't enough -- even though it's higher than median income. Maybe it's wrong for the government to be "taking YOUR money," but that's how it shakes out.

What this is really about is taxing hardworking professionals earning 256,000 dollars. Should that six thousand dollars be subject to a 39.6% tax or a 33% tax? The difference is almost four hundred bucks. When you get to people making tens of millions of dollars "regular people" - Democrat and Republican - are less sympathetic. What did George Clooney, Kanye West etc. do to earn that much money?

Completely off topic and completely fascinating:

A few days ago I was at an on campus presentation by Goldman Sachs (they were recruiting for front-office, middle-office, and back-office positions since my school is top 15 but no Harvard/Yale/Princeton). Anyway, I found it interesting how often they threw around the word "intelligent". Nearly every ten seconds they described their employees as a "smart group of people from any background".

More interestingly, they are totally unconcerned with skill set or knowledge. Economics majors are given no preferential treatment over philosophy or English majors. They also said that they would prefer a captain of the lacrosse team over the president of the investment club.

If anything this suggests that the elite of this country obviously believes in HBD.

This stands in sharp contrast with engineering/government companies which are generally concerned with knowledge capital and skills.

"What did George Clooney, Kanye West etc. do to earn that much money?"

Go whine somewhere else. If people want to spend their cash on Clooney and West stuff, that's called a free market.

I bet in real life you are beyond annoying.

@Alex

There is glaring contradiction in what you just describe. If they believe in HBD, why would they prefer the captain of the lacrosse team (who is likely to be less intelligent) to the president of the investment club? They talked a lot about intelligence, but are they looking for the most intelligent people to work for them? They care about intelligence, yet they don't care about intelligence.

http://cornellsun.com/node/44865&urlhash=-gIW&goback=.gde_90917_member_35452244

Well, apparently some kids at Cornell want to kick GS off campus. Because I-banking is evil. I don't understand the industry enough to judge it, but my general impression is that I-banks do not create any real value for society.

GS was also on my campus a few days ago. HM.

"More interestingly, they are totally unconcerned with skill set or knowledge. Economics majors are given no preferential treatment over philosophy or English majors. They also said that they would prefer a captain of the lacrosse team over the president of the investment club."

The top 20 universities certainly have become less concerned with skill sets, aside from their STEM departments which still manage to deal useful research. Sigma pointed out that Harvard doesn't even teach accounting.

The result of forgetting to teach "the basics" such as intermediate accounting in favor of "feel good" liberal arts courses about global warming has been that only 10% of Fortune 500 CEOs now have Ivy League educations whereas 20-30 years ago Ivy Leaguers comprised 25% of Fortune 500 CEOs.

Ivy League degrees are becoming increasingly irrelevant to success in the private sector where results are expected.

"The vast majority of small businesses either fail, or never make their owners especially rich."

I used to do taxes for small businesses and none of them paid the top rate. The only ones that had income close to 250k were lawyers and doctors. The others made far less. People who had federal pensions had more income then most small businessmen outside of law and medicine.

I think the GOP is exploiting the fact that most people have inflated expectations of what most small businessmen earn in profits. Many people, including a lot of business owners, confuse gross income with net income.

HS: Smart people like Paul Krugman who has a Nobel Prize and is a professor at Princeton University?

You're digging deeper, his Nobel was for trade theory* that had almost nothing to do with domestic tax policies. His insight was that two rich economies have the money to accumulate variety and thus trade more than a rich and poor economy (ie Some Americans prefer BMWs to Lincolns, and some Germans prefer Oracle to SAP). Prior to that trade theory would have predicted that rich countries would trade most with poor nations because rich countries should specialize in similar industries with each other and dissimilar industries than poor nations.

*The timing was really for being anti-bush, but everyone knew he'd get one eventually.

Alex,
BearStearns was the firm that preferred to hire PSDs (poor, smart, and a deep desire to be rich), Goldman has always preferred those with the most social capital. That and frequently going it alone were why few tears were shed at Bear's demise.

"...but my general impression is that I-banks do not create any real value for society."

Please define "real value for society."

I run a successful small business. Sometimes I envy the mail lady who drops off the mail every day. She has a secure income, health insurance, and retirement, cannot get fired, and gets to walk all day which is healthy. She gets three weeks paid vacation. She does not have to meet a payroll. Most of all she has no stress. True, she will never make a lot of money, but then why should she? The rest of us can make a lot of money and she can vote Democratic and simply sponge.

In investing all things held constant, the money manager who earns the same amount of money with a lower risk portfolio is considered the better manager. I would say the same thing applies to a business. If I take huge risks and end up earning the same amount of money than the mail lady then I’m fucked.

Posted by: Shawn
"If a owner can make money off an employee, post all expenses, she will hire him regardless of the taxes."

*are you sure about that?*
What if I can make more money putting my money elsewhere?

Posted by: Mercer
"I used to do taxes for small businesses and none of them paid the top rate. The only ones that had income close to 250k were lawyers and doctors. The others made far less. People who had federal pensions had more income then most small businessmen outside of law and medicine."

*open secret*
The truly rich (and no I don't mean your lawyer or dentist that overcharges you) I mean the really heavy hitters who increase their net worth by over a million bucks a year make their money through "capital gains" NOT "income".

Capital gains are taxed at a lower rate than personal income (especially long term capital gains). Rich people primarily make their money NOT from a "salary"/income like the middle class, instead they make it through an increase in asset values aka capital gains. This is why income taxes are almost irrelevant for the rich.

And that's the "secret" that most of society will never figure out. The true victims of income tax increase are the upper-middle class.

"If they believe in HBD, why would they prefer the captain of the lacrosse team (who is likely to be less intelligent) to the president of the investment club?"

Is this true? It seems counter intuitive.

"There is glaring contradiction in what you just describe. If they believe in HBD, why would they prefer the captain of the lacrosse team (who is likely to be less intelligent) to the president of the investment club? They talked a lot about intelligence, but are they looking for the most intelligent people to work for them? They care about intelligence, yet they don't care about intelligence. "

The president of the investment club is probably no more intelligent than any other student. As for the lacrosse team comment, I meant that they preferred general social ability over specific skill sets.

"The result of forgetting to teach "the basics" such as intermediate accounting in favor of "feel good" liberal arts courses about global warming has been that only 10% of Fortune 500 CEOs now have Ivy League educations whereas 20-30 years ago Ivy Leaguers comprised 25% of Fortune 500 CEOs."

I wonder how the numbers work out if we use a statistic like top 20 university, rather than just the Ivy League. A lot of schools like Stanford and MIT are probably well represented on that list.

"If I take huge risks and end up earning the same amount of money than the mail lady then I’m fucked."

You are fucked if becoming rich was the reason you decided to start a business. Many people start a business so they can be their own boss, don't have to deal with office politics and set their own schedule etc. They are happy being self employed even if they don't earn more then a postal worker.

There is an incredibly deep-seated mythology in America. One tennet of this mythology is that All Wealth Is Earned ergo The Rich Are Of Higher Value And Character. Taxing the wealthy is seen as punishing hard work and grit.

Of course rich people and their proponents know this is a myth but also know how persuasive this mythology is in convincing non-rich people to vote for politicians whose ideology is starkly at odds with that persons self-interest.

The rich are the biggest beneficiaries of the American system - they have benefitted more from what this country offers them. I feel that paying a larger tax (in this case relatively slight in real numbers) is appropriate for the ones who have benefitted most.

Sometimes it's said that the world is divided into hard-working creators of value and worthless parasites. It is a matter of ideology that determines what groups get which label.

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