Tuesday, December 28, 2010
Help Needed!
My feeble brain is tired as we prepare to close out the year, and I need your help with two issues from the lame duck Congress.
First, Congress recently extended the Bush tax cuts for everyone including the highest earning Americans on the grounds that many of these "wealthy" Americans are small business owners who will react to higher taxes by not hiring and expanding their businesses. But, wouldn't higher taxes likely have the opposite effect on small businesses? I am not advocating higher taxes for anyone, but I am puzzled by this rationale. With higher taxes the small business person has two options - give more of their earnings to the government or invest in the small business by hiring and expanding. The third possibility - taking that money home is not an option with higher taxes. Am I wrong in my analysis?
Second, the estate tax. Doesn't the existence of an estate tax provide incentive to wealthy people to dispose of their assets in their life times? And, might this be a good thing? Again, I am not arguing for an estate tax, but I would like to hear arguments about why it is a bad idea?
Thank you in advance for your thoughts.
https://mirrorofjustice.blogs.com/mirrorofjustice/2010/12/help-needed.html
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Prof. Scaperlanda:
Higher taxes do not present the small business owner with any options at all. The government simply seizes more money.
Lowering taxes means that more money is available for the small business owner to either take home or reinvest in the business. Assuming that the small business owner always puts some fraction of the money back in the business, then lowering taxes will increase that reinvestment. Further, if having higher income gives the small business owner more confidence in his or her financial position, the percentage reinvested might also increase.
The premise of the question seems to be that reinvestment is done with pre-tax income, and while some deductions are available for certain expenditures in the present tax year, most reinvestment is with post-tax dollars.
As to the estate tax, I don't think the burden should be on those who oppose it. Rather the natural position is one where there is no estate tax and the taxers have the burden to argue why there should be one. I would submit there are not any principled arguments for the estate tax. Inter vivos transfers incur taxes also (except for gifts, but those are limited annually), so maybe I just don't understand the premise here.