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Friday, November 16, 2012

Who Does The Tax Increase Punish?

The wife and I had an interesting discussion yesterday about the coming fiscal cliff, or even the coming solutions to it.

The President was railing once again about the evil rich folks who don't pay their fair share, and how going back to the Clinton era tax brackets is our solution. If they just pay more, everything will be good. He didn't tell the whole story (of course). For instance, IF; and it's a big IF; everyone in those brackets paid the additional taxes he wants, it only takes care of about 2.5% of the deficit.

He also failed to mention that the Clinton era brackets wouldn't start higher taxes at $200,000 and $250,000 for couples. The 33% bracket from that era started at $150,000 and $178,000 for couples.

The biggest thing he missed though is that it's not those people that get hurt by the tax increase, that's where our discussion started. We go out for breakfast every weekend, there are about 10 or so contractors, all self employed who are in that restaurant with us every Saturday and Sunday. Most of them are actually there about 5 times a week. They all fall into those tax brackets, not because they make a ton of money, but because their business income is taxed at the personal rate.

Most would see a tax increase of about $30 per week. Not a huge deal, really. But how do they adjust for it? What if they decide that to save that $30  they just stop going to the restaurant except on weekends? Well, they each save their $30 by cutting out 3 trips a week. However, the restaurant just lost $300 a week from just that group.

Since the restaurant has 2 waitresses, 2 cooks, a dishwasher and a busboy, and isn't huge, the easiest way for them to make up for the lost money would be lay off the busboy and have the waitresses bus their own tables.So that lost revenue doesn't really hurt the restaurant, it hurts the busboy, who didn't see his taxes go up, he sees his entire paycheck go away.

Then their is the waitress. She doesn't make enough to see her taxes go up, but since these guys aren't spending $300 a week there, she loses the tips from them, even at 15% that's a $45 hit to her pocketbooks, 50% higher than the tax hit the "evil rich guys" took from the new brackets.

On a bigger scale, think about Richard Trumpka, the labor leader who, with the President, has decided "evil businesses" need to pay more in taxes. Who does a business tax really hurt?

Say the company I work for (which employs 48,000 people) had it's taxes increase by $25 million dollars. The company is profitable, but does have an obligation (by law) to shareholders to maximize their return, so they have to find a way to put that money back into their bottom line.

As an example, there is a planned plant expansion in central Illinois, but to make up the $25 million they decide to forgo it. Now, did the company get hurt by the tax increase, or did the guys Trumpka supposedly represents, the labor force get hurt? No electricians, bricklayers, laborers and pipe fitters are going to be hired to do that work. So instead of 9 months of good paying work building that new building, they get to sit in the union hall wishing they had work.

Admittedly, the current workers at the plant may benefit by getting increased overtime, but there won't be new workers hired to work on the expanded area of the plant, either.

One of the biggest problems liberals have always had is they see everything as a static equation. If I raise tax A income will go up to the government. They never look at the other side of the equation, which is that the person paying the tax has to do something to account for the lost money.

 For those who've forgotten, President Clinton decided in the 1990's to punish the rich by putting a luxury tax on yachts, expensive cars and other purchases. The tax collected almost nothing, but it did manage to put a fairly large number of companies that built those big boats out of business. The rich still bought their boats, they just bought them from other countries. The only folks who were punished by the tax were the workers in the US.

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